    [House Hearing, 106 Congress]
    [From the U.S. Government Publishing Office]

     E-COMMERCE: THE BENEFITS AND PITFALLS OF CONDUCTING BUSINESS OVER THE
                                    INTERNET

    =======================================================================

                                    HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 WASHINGTON, DC

                                   __________

                                  MAY 26, 1999

                                   __________

                               Serial No. 106-15

                                   __________

             Printed for the use of the Committee on Small Business

                          U.S. GOVERNMENT PRINTING OFFICE
    60-258                        WASHINGTON : 1999

                          COMMITTEE ON SMALL BUSINESS

                      JAMES M. TALENT, Missouri, Chairman
    LARRY COMBEST, Texas                 NYDIA M. VELAZQUEZ, New York
    JOEL HEFLEY, Colorado                JUANITA MILLENDER-McDONALD,
    DONALD A. MANZULLO, Illinois             California
    ROSCOE G. BARTLETT, Maryland         DANNY K. DAVIS, Illinois
    FRANK A. LoBIONDO, New Jersey        CAROLYN McCARTHY, New York
    SUE W. KELLY, New York               BILL PASCRELL, New Jersey
    STEVEN J. CHABOT, Ohio               RUBEN HINOJOSA, Texas
    PHIL ENGLISH, Pennsylvania           DONNA M. CHRISTIAN-CHRISTENSEN,
    DAVID M. McINTOSH, Indiana               Virgin Islands
    RICK HILL, Montana                   ROBERT A. BRADY, Pennsylvania
    JOSEPH R. PITTS, Pennsylvania        TOM UDALL, New Mexico
    MICHAEL P. FORBES, New York          DENNIS MOORE, Kansas
    JOHN E. SWEENEY, New York            STEPHANIE TUBBS JONES, Ohio
    PATRICK J. TOOMEY, Pennsylvania      CHARLES A. GONZALEZ, Texas
    JIM DeMINT, South Carolina           DAVID D. PHELPS, Illinois
    EDWARD PEASE, Indiana                GRACE F. NAPOLITANO, California
    JOHN THUNE, South Dakota             BRIAN BAIRD, Washington
    MARY BONO, California                MARK UDALL, Colorado
                                         SHELLEY BERKLEY, Nevada
                         Harry Katrichis, Chief Counsel
                      Michael Day, Minority Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on May 26, 1999.....................................     1

                                   Witnesses

    Hill, Daniel O., Assistant Administrator for Technology, U.S.
      Small Business Administration..................................     6
    Miller, Harris N., President, Information Technology Association
      of America.....................................................     8
    Whinston, Andrew B., Director, Center for Research in Electronic
      Commerce, University of Texas at Austin........................    11
    Anderson, Alan W., Senior Vice President, American Institute of
      Certified Public Accountants...................................    13
    Hanson, Brian, Owner, Hanson Bros. Fresh Seafood.................    15

                                    Appendix

    Opening statements:
        Talent, Hon. James M.........................................    57
        Velazquez, Hon. Nydia M......................................    61
        McCarthy, Hon. Carolyn.......................................    65
        Sweeney, Hon. John E.........................................    66
    Prepared statements:
        Hill, Daniel O...............................................    69
        Miller, Harris N.............................................    80
        Whinston, Andrew B...........................................    92
        Anderson, Alan W.............................................   114
        Hanson, Brian................................................   158
    Additional material:
        Additional Information Submitted by the Small Business
          Administration.............................................   162

     ELECTRONIC COMMERCE: THE BENEFITS AND PITFALLS OF CONDUCTING BUSINESS
                               OVER THE INTERNET

                                  ----------

                            WEDNESDAY, MAY 26, 1999

                              House of Representatives,
                                   Committee on Small Business,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 10 a.m., in Room
    2361, Rayburn House Office Building, Hon. Jim Talent (chair of
    the Committee) presiding.
        Present: Representatives Talent, LoBiondo, Kelly, Pitts,
    Forbes, Sweeney, Thune, Velazquez, Pascrell, Christensen,
    Brady, Moore, Napolitano, Baird, and Mark Udall.
        Chairman Talent. I will convene the hearing. I am informed
    that the ranking member, Ms. Velazquez, is in a markup in the
    Banking Committee. So I will go ahead without her and when she
    comes, we will suspend the hearing so she can make her opening
    statement then if she prefers.
        Electronic commerce, commonly referred to as e-commerce, is
    altering the way we conduct many of our business and personal
    transactions.
        E-commerce is simply the ability to conduct many of our
    business and personal transactions over the Internet. Some of
    the most familiar forms of e-commerce are business-to-consumer
    transactions where a company sells its product to a consumer
    over the Internet in a way that is similar to traditional mail
    order catalogs.
        Some popular examples of this type of e-commerce are Barnes
    and Nobles.com, Amazon.com and CDNow.com.
        While consumer purchasing is the most popular notion of e-
    commerce, business-to-business sales actually comprise the
    majority of e-commerce transactions. This is important because
    many small businesses have not yet embraced the notion of e-
    commerce.
        According to eMarketer, less than 2 percent of the 7
    million U.S. small businesses with fewer than 100 employees
    conduct on-line transactions. Of the 340,000 U.S. business Web
    sites, 145,000 sell products and services on-line. Most of
    these businesses are big companies. In fact, 40 percent of
    companies with over 1,000 or more employees conduct on-line
    transactions.
        These numbers mean that small businesses face the potential
    of losing market share to companies that are staying ahead of
    this technological wave. Indeed, a recent study by Merrill
    Lynch shows that only companies that attain market share on-
    line will survive.
        The Merrill Lynch study points to the growth of Internet
    banking, brokerages, and publishers as a direct threat to their
    brick and mortar counterparts.
        The study concluded that, quote, the Internet tends to
    cannibalize retail sales away from store-based retailers, end
    quote.
        E-commerce has attracted many businesses because it has the
    ability to make them more efficient. Additionally, many
    consumers find that computer-based purchasing is easier and
    quicker than fighting traffic and crowds at their local
    shopping mall. A website has the ability to turn a local
    operation into a nationwide or global operation because the
    Internet can reach consumers at the far corners of the Earth.
        Another important benefit of e-commerce is its ability to
    enable employees to handle multiple tasks, since they do not
    have to spend all of their time taking orders over the
    telephone. Additionally, e-commerce has the potential to
    eliminate points in the supply chain and enable manufacturers
    to offer products directly related to the consumer, with the
    aid and expense of traditional distribution in retail chains.
        Finally, the Internet is an easy place for a business to
    obtain its customers' demographics and preferences through
    simple point and click inquiries of those who visit its
    website.
        Although e-commerce has the potential to be a powerful
    force and change the way companies conduct businesses, there
    are some concerns. Many are fearful of transmitting their
    credit card numbers and home addresses over the Internet
    because of the pervasive threat of hackers who can bypass
    supposedly secure networks and later commit fraudulent
    transactions.
        There are also many complaints about the poor return in
    exchange services offered by on-line retailers when their
    customers are not satisfied with their purchases.
        The theft of intellectual property over the Internet has
    also become a pervasive problem. The music industry, to use one
    high profile example, has had difficulty maintaining control of
    its product due to illegal, free downloads that are available
    on thousands of electronic bulletin boards.
        This is the first time that this Committee is tackling the
    issue of e-commerce, and I am sure we will have an interesting
    discussion about its positive aspects and its drawbacks. We
    will hear testimony from Daniel Hill, the Assistant
    Administrator for Technology of the Small Business
    Administration; Harris Miller, who is President of the
    Information Technology Association of America; Professor Andrew
    Whinston, the Director of the Center for Research and
    Electronic Commerce at the University of Texas at Austin; Alan
    Anderson, the Senior Vice President of the American Institute
    of Certified Public Accountants; and Brian Hanson the founder
    of Hanson Brothers Fresh Seafood in Portland, Maine.
        The Internet is an exciting and still developing medium for
    companies to use to conduct businesses. I am looking forward to
    the testimony of our witnesses.
        [Mr. Talent's statement may be found in the appendix.]
        Chairman Talent. When Ms. Velazquez comes, I will be happy
    to recognize her for any comments that she may wish to make.
    And we will go to the witnesses after we have a demonstration
    of how e-commerce operates. So I am going to ask our Committee
    counsel, Mr. Andrews, to proceed with a mock electronic-
    commerce transaction.
        Mr. Andrews. Yes.
        Chairman Talent. We are not actually going to purchase
    lobster from Hanson Brothers Fresh Seafood today, but we are
    going to show everybody how it would work if we did indeed want
    to do that.
        I will note that today's mock transaction is with the
    business of one of our witnesses today, Mr. Hanson, who we will
    hear from later.
        Mr. Andrews. Thank you, Mr. Chairman. What we are going to
    do is, as you said, go to the website of the Hanson Brother
    Fresh Seafood Company. The website is www.SeafoodNow.com. We
    are going to operate all the way up until we actually have to
    put in a credit card number.
        Chairman Talent. The Committee counsel asked if he could
    use my credit card number tomake the transaction a reality, and
    I said no. So that is as far as we are going to go towards verity here.
    but perhaps I will be the Dr. Watson of this whole drama, and on behalf
    of everybody here who is computer illiterate, as the chairman is, ask
    the questions that everybody else might be thinking.
        The e-commerce, is it usually done over the website or is
    there a separate Internet location?
        Mr. Andrews. Well, once you place your order, most websites
    take you to a secure website where the information is
    encrypted.
        Encryption is basically just a way to transform the
    information into a complex array of algorithms similar to
    nuclear launch codes.
        Now, what I am going to do is move down the website, to
    select an item. and today with your credit card number, sir, we
    are going to purchase blue claw crab.
        As you can see, the website has a description of blue claw
    crab. It is number 251. It is $9.99 per pound with a five-pound
    minimum order. And it is a popular item so it is unavailable.
    So we shall select another one.
        Chairman Talent. Mr. Baird wants to know how you get the
    crab through the telephone wire. It is questions like that that
    show why we desperately need this hearing.
        Mr. Forbes. It is called virtual reality.
        Chairman Talent. Now, do most of these websites have a list
    perhaps of commonly asked questions, I mean, if you have a
    question about the product, can you do that through the
    Internet?
        Mr. Andrews. Most good websites will have a FAQ section, a
    frequently asked questions section, where many basic questions
    can be answered right at the website.
        Chairman Talent. Okay.
        Mr. Andrews. So now what we are going to do is order 10
    lobster dinners for $400.95. Each lobster is approximately one
    and a half pounds. We would enter the number we want in
    quantity box and just click here to hook this item for your
    order.
        I haven't put in the credit card yet. So right now we are
    at a screen, commonly called the shipping cart screen, which is
    an electronic version of what you would have in your regular
    grocery store, a shopping cart. Right now, If we look at our
    shopping cart we have Cold Bay's Downeast Lobster Feed for 10,
    quantity one, and the price. So I can either recalculate, check
    out, or stop shopping, and I want the check our because that is
    all that I want to order
        On the screen, you have a security alert: You are about to
    view pages over a secure connection. Any information you
    exchange with this website cannot be viewed by anyone else on
    the Web.
        Chairman Talent. It is at the point at the end of the order
    sequence that you go to the secure website?
        Mr. Andrews. Yes, sir, that is correct.
        Chairman Talent. We can ask witnesses today if we want to
    about how secure this is or what steps have been taken to make
    sure they are secure, what concerns there are in this area, et
    cetera?
        Mr. Andrews. Yes, sir. that will be apart of some of the
    testimony that we will be given today.
        Chairman Talent. Okay. Do any Committee Members have
    questions before we end the demonstration Here?
        All right. Thank you, Mr. Andrews. We will go to the
    witnesses.
        If we could have the lights please.
        The ranking member has come and I am pleased to recognize
    her for her opening statement
        Ms. Velazquez. Thank you, Mr. Chairman, and thank you for
    holding the hearing on e-commerce. This is a very important
    topic for our Nation's small businesses and I look forward to
    hearing the witness testimony.
        The Internet revolution is rapidly transforming the way the
    Nation communicates with information and perhaps most
    importantly the way it does business. In 1997, Internet
    commerce accounted for $1.3 billion in retail sales in the
    United States, and though this represents only a small fraction
    of the total, the number is expected to increase to $25 billion
    by the year 2000.
        Furthermore, because the Internet allows small businesses
    to expand more rapidly, it is now possible for entrepreneur to
    reach new customer across the country and around the world with
    a few strokes of the keyboard. The low start-up costs of e-
    commerce also enables a greater number of people to start a
    business by removing many of the traditional barriers, and a
    further advantage is that a small business can be open the 24
    hours a day, 7 days a week.
        As these facts indicate e-commerce offers a great deal of
    promise to the future of this Nation's small businesses and, in
    all likelihood, it is only going to grow. Despite all the
    possibilities of success, however, e-commerce also carries with
    it a number of potential pitfalls for the small business
    community.
        There is a great deal of uncertainty about the issue of
    taxes. Although there is currently a moratorium on new taxes,
    many brick and mortar stores, which chart sales tax, are losing
    customers. Additionally, studies have shown that many consumers
    are comparison shopping at traditional stores and buying over
    the Internet.
        As a result, traditional stores, which pay salespeople and
    need to have showrooms, are also losing out. This also ties in
    with the lack of intimacy on which many small businesses rely
    for their customers. The growth of e-commerce has provided
    consumers with unprecedented information about products and
    prices. Some enterprises worry that if they lose intimacy with
    their customers, they will not longer know their needs, a key
    element in remaining competitive with larger, more impersonal
    competitors.
        These are obviously issues that need to be addressed if
    small businesses are to remain competitive. As such, e-commerce
    is the double-edged sword for small businesses. It offers them
    the chance to reach out to new customers and provides greater
    flexibility.
        At the same time, however, the loss of interaction with the
    consumers and lower costs on the Internet represent a
    substantial threat that needs to be addressed. I am glad that
    the Chairman has called today's hearing because it is still
    early enough to study the potential problems small businesses
    may face and work to address these issues. I remain confident
    that our Nation's entrepreneurs will continue to thrive. They
    have faced numerous challenges in the past and one can see from
    the unprecedented economic growth we are experiencing that
    small businesses have met those challenges.
        Once again, thank you Mr. Chairman, for holding this
    hearing.
        [Ms. Velazquez' statement may be found in the appendix.]
        Chairman Talent. I thank the gentlelady, as always. We will
    go right to the witnesses.
        The gentleman from New Jersey has asked about more opening
    statements. It is the general practice of the Committee, unless
    there is some special interest or history of one of the members
    with it, just to go with the opening statements from me and the
    ranking member but if you want to put one in the record that
    would be fine.
        I will tell you what, Mr. Pascrell, your interest and
    involvement in the Committee is such that with everybody's
    indulgence, go right ahead. I will recognize you for a few
    minutes.
        Mr. Pascrell. Thank you, Mr. Chairman.
        I will not read my entire statement. I will put it into the
    record.
        I am very concerned, Mr. Chairman, about something you have
    spoken about and the ranking member have spoken about, and that
    is the issue of taxes and the Web.
        I can remember, as a mayor of a city, Mr. Chairman, having
    to deal with many trucks that rolled into my fairly large
    community, set up base on a street and sold out of the back of
    the truck furniture, to you name it, and in the city you name
    it. Those folks who came up from different parts of the South
    to sell their wares made decent products. They not only put at
    disadvantage those folks within the community who sold those
    same products, similar products, but they also, since they were
    mobile, they also paid no taxes whatsoever to the community
    where taxes were called for.
        I know we have put a moratorium on this, but as this grows
    and as the Internet grows, we need to be very aware and very
    sensitive, and I thank you for having this hearing, to what
    this is going to mean in terms of local revenues. If this is a
    way to skirt the issue, to skirt taxes, as that truck that
    wheeled into Patterson, New Jersey, so many times, I think this
    is a lot more serious than we think. This is happening all
    across the United States of America.
        To me, there is no difference between selling things on the
    Internet and whelling a truck into town from another state;
    there is none whatsoever. I think we need to understand what's
    at stake here and move accordingly.
        I thank you for allowing me to make an opening statement.
        Chairman Talent. Of course. I appreciate the gentleman's
    point. It is a very serious one. Not only is this a potential
    threat to the revenue base of municipalities and States but, it
    introduced a potentially unfair note of competition with the
    retailers who do have to collect sales taxes. We have all
    struggled with this in other contexts with catalog sales, and
    the gentleman mentions another instance, these roving
    retailers, if you will, and this is one of the major issues we
    have to confront with regard to Internet sales.
        I don't think anybody in principle wants to prevent people
    from doing e-commerce, but the question is whether, and to what
    extent, we should insist upon equality in tax treatment. That
    is a major issue that only the Congress can deal with and I
    appreciate the gentleman's opening statement. I am sure he will
    want to follow up with questions on that issue.
        Our first witness is Mr. Daniel Hill, the Assistant
    Administrator for Technology of the U.S. Small Business
    Administration. Mr. Hill.

     STATEMENT OF MR. DANIEL O. HILL, ASSISTANT ADMINISTRATOR FOR
        TECHNOLOGY, UNITED STATES SMALL BUSINESS ADMINISTRATION

        Mr. Hill. Thank you, Mr. Chairman. Good morning, Mr.
    Chairman, and members of the Committee. I will keep my remarks
    brief and with your permission ask that my full written
    statement be incorporated into the record.
        Chairman Talent. Without objection, and we appreciate your
    brevity. Thank you.
        Mr. Hill. Thank you for inviting the U.S. Small Business
    Administration to appear before you to discuss our current
    activities in the area of electronic commerce, otherwise known
    as e-commerce. My name is Daniel Hill and I am the Assistant
    Administrator for Technology at the SBA.
        It is indeed the age of electronic commerce. Twenty-seven
    million purchases are now made on the world Wide Web every day.
    At the beginning of 1993, there were just 50 sites on the Web
    and now the number is estimated to be over one billion. The
    number of small firms engaged in electronic commerce is growing
    rapidly. Global electronic commerce is expected to grow to more
    than $300 billion annually in just a few years.
        The percentage of small businesses will access to the
    Internet nearly doubled in the past 2 years from under 22
    percent in 1996 to over 41 percent in 1998. But there remain
    significant obstacles to small business involvement in this new
    medium. The SBA is working and committed to help small
    businesses overcome these obstacles and take advantage of the
    many opportunities afforded by electronic commerce.
        What is electronic commerce? Electronic commerce refers to
    more than just the buying and selling of goods over the
    Internet. It is using the power of computers, the Internet and
    shared software to send and receive product specifications,
    drawings, bids, purchase orders and invoices, and any other
    type of data that needs to be communicated to customers,
    suppliers or employees.
        Electronic commerce is a new way to conduct business,
    affecting not only internal business activities within a firm
    but also requiring new kinds of coordination with other clients
    and other institutions.
        In most industries, this requires the adoption of new
    business models involving new organizational structures and
    business strategies.
        The potential opportunities that electronic commerce and
    the Internet afford small business are staggering. The smallest
    companies now can have instant access to customers and
    suppliers worldwide in ways that only the largest multinational
    corporations have had in the past, and, many small businesses
    are being formed on the basis of this new-found opportunity.
        At the same time, small firms that do not adopt electronic
    techniques run the risk of losing market share and customers
    from missed opportunities. At the SBA, we are working hard to
    encourage small business involvement in electronic commerce
    both as users and as developers and innovators of this new
    technology.
        Many small firms do not have access to the Internet and do
    not understand the need for it. These firms are in danger of
    missing the competitive opportunities made possible by
    electronic commerce. The SBA can and does play an important
    role in helping such firms by providing technical assistance,
    training and information.
        At the other end of the spectrum of small firms are the new
    high-tech start-ups that are formed with advanced computer and
    information technology expertise. Many of these firms are in
    the business of developing and adapting the information,
    telecommunications and computer technologies that make
    electronic commerce possible. They are at the cutting edge of
    the Internet and electronic computer technologies. These firms
    do not need assistance or training, but they do need to have a
    fair legal and regulatory environment to foster innovation.
        The SBA is working hard on the various electronic commerce
    related projects, which I have included in my full written
    testimony. We will be introducing very shortly an e-commerce
    course on our on-line classroom. We are working with other
    government agencies. We are working with credit card companies.
    We are part of the digital economy working, that is being
    chaired by the White House.
        We have created a number of Internet-based systems, PRO-NET
    and ACE-NET, and we areabout to unveil TECH-NET. I have
    attached complete descriptions of those projects in my written
    testimony.
        Our ongoing activities are consistent with President
    Clinton's directive on electronic commerce and policy which was
    issued November 30, 1998. This statement directed the U.S.
    Department of Commerce and the Small Business Administration to
    develop strategies to help small businesses overcome barriers
    to the use of the Internet and electronic commerce.
        In response, we are planning a series of activities and
    working closely with the Department of Commerce, and other
    agencies as well, to implement a broad-based effort to identify
    specific areas of need and to provide outreach, extension and
    technical assistance to small firms.
        Some of our plans include working in partnership with the
    private sector and other Federal agencies. We have already
    talked with the ITAA, whom you will hear from shortly. We are
    going to target small, minority and women-owned businesses,
    educating them about electronic commerce. We want to develop a
    framework for understanding the ways electronic commerce and
    the Internet affect small business activities, including
    marketing, network production and innovation. We are also
    developing improved means of measuring and analyzing this
    impact.
        We have a tremendous website already on-line. We intend to
    expand on that. We want to reach out to every small business to
    make them aware of the benefits of Internet and EDI, electronic
    data interchange.
        Of course, our traditional role is to provide the training,
    the consultation and, where possible, some technical support
    services in concert with our resource partners.
        SBA's FY 2000 budget request to Congress includes $2
    million to help support some of these electronic commerce
    activities that I have spoken about. If approved, we propose to
    use these funds to carry out the presidential directive and
    work with private sector and other Federal agencies engaged in
    electronic commerce.
        Thank you for the opportunity, Mr. Chairman, to discuss
    SBA's activities in the area of electronic commerce. I will be
    happy to answer any questions that you and the Committee might
    have. Thank you.
        [Mr. Hill's statement may be found in the appendix.]
        Chairman Talent. Thank you, Mr. Hill.
        Our next witness is Mr. Harris N. Miller, who is the
    President of the Information Technology Association of America
    in Arlington, Virginia. Mr. Miller.

       STATEMENT OF MR. HARRIS N. MILLER, PRESIDENT, INFORMATION
            TECHNOLOGY ASSOCIATION OF AMERICA, ARLINGTON, VA

        Mr. Miller. Chairman Talent, thank you for having me back
    before the Committee. I appreciate the opportunity. I would
    like to have my full statement included in the record.
        I also have a request whether counsel is going to serve us
    some of that lobster after the hearing as a reward for our
    appearing here before your Committee.
        Chairman Talent. If the Information Technology Association
    wants to use its credit card.
        Mr. Miller. I will have to check on that. Thank you.
        Chairman Talent, I would like to thank you for the
    opportunity to appear before your Committee and address the
    benefits and challenges, I wouldn't use the word pitfalls, of
    electronic commerce for small businesses. As president of an
    association which represents over 11,000 companies in the IT
    sector, we believe that electronic commerce provides great
    opportunities to channel the entrepreneurial spirit of every
    small business person to grow his or her business and become an
    even more effective part of the electronic commerce digital
    age.
        Today I will outline the dispel six myths which we find in
    talking to small businesses and then give you some sense of the
    benefits of electronic commerce among small businesses.
        Number one, as Mr. Hill pointed out, there is the myth that
    e-commerce consists solely of buying and selling on the
    Internet. In fact, e-commerce is much more than that. It
    includes customer service, sending e-mails, marketing,
    advertising, transferring funds between business, doing on-line
    research. That is all part of e-commerce.
        So any small business which is saying, how do I get into e-
    commerce, should realize it is more than just the physical
    transaction of ordering a book or ordering some lobster or
    ordering a sweater.
        Secondly, many small businesses believe that to be
    successful in electronic commerce, all they need is to hook up
    to the Internet.
        Ladies and gentlemen of the Committee, e-commerce success
    for a small business is much more than that. Even the smallest
    firms with the least complicated business models must plan
    their strategy carefully and recognize the potential challenges
    that may await them.
        They need to factor into their entire business model how
    electronic commerce can help them. For example, if they don't
    hook into their ordering system, their supply system, their
    financial management system, their marketing system, the
    electronic commerce transactions and advertising they are
    doing, they are not taking full advantage of it. So we think
    this is a great opportunity for small businesses, and using the
    digital age they can be as effective and efficient and as
    productive as even the largest businesses.
        A third myth is that people think that electronic commerce
    means solely selling products to consumers over the Internet.
    While the growth in consumer purchases on-line is certainly
    growing dramatically and is the stuff of front page stories in
    USA Today, the fact is that by most metrics over 80 percent of
    electronic transactions worldwide are business-to-business, not
    business-to-consumers.
        Another great opportunity, therefore, for small businesses
    is that more and more large businesses in the supply chain
    expect that their suppliers will be able to conduct business
    on-line. You hear the phrase frequently, disintermediation.
    What that means is eliminating the middleman, creating new
    opportunities for small businesses to sell directly to large
    businesses.
        For example, in the automotive world, the large automotive
    producers which used to only order from a very limited number
    of manufacturers and a limited number of small businesses, now
    because of the Internet order from hundred and thousands of
    suppliers, because it is so inexpensive to do business over the
    Internet.
        A fourth myth is that there are no programs to help small
    and medium enteprises; this is primarily a big business
    opportunity. Well, as Mr. Hill outlined, there are many other
    oportunities. In fact, there are many opportunities for small
    business to learn about and to take advantage of electronic
    commerce. Large and small companies alike are providing
    technical assistance to small businesses, sometimes free of
    charge, sometimes with relatively minimal charges, because they
    want to get people into the e-business world.
        The commercial service of the U.S. Department of Commerce
    has developed programs to reach out to small and medium
    enterprises, particularly to give them more advantages in
    export opportunities.
        Mr. Hill outlined the numerous programs at the Small
    Business Administration. Even theDepartment of Defense has a
    program called the electronic commerce resource centers, which advise
    small businesses, often for free, on how to do business with the
    Federal Government electronically.
        Of course, associations such as ours work with small
    businesses all the time to give them free advice on using the
    electronic commerce world.
        Another myth is that every small business person has to
    become a computer geek in order to take advantage of the
    electronic commerce world. That is not true, Mr. Chairman.
    There are plenty of very good services out there where a
    person, as long as he or she knows his or her business and
    works with the information technology community, can easily
    become part of electronic commerce without becoming an expert
    in electronic commerce technology itself.
        The last issue I want to address is that a lot of
    government intervention is going to be necessary here. On the
    contrary, we believe that industry is showing a great deal of
    leadership and self-regulation such as areas like the On-line
    Privacy Alliance which are protecting consumer privacy.
        What does this mean in dollar terms? Well, electronic
    commerce solutions, to give you one example, can reduce the
    costs of a transaction of buying and selling business to
    business or business to consumer by over 90 percent; over 90
    percent. Obviously, that can go right to the bottom line of a
    small business if it can take these transaction costs out of
    its sale.
        It costs Ford Motor Company, for example, $5,000 to get you
    a car, but using the Internet, in its Ford supplier network, it
    plans to reduce that distribution support cost to $500 per car.
        A survey of 500 large companies with sophisticated networks
    found out that 23 percent are using outside firms for
    installation, and they are primarily using small and medium
    enterprises.
        Let me last introduce the issue that Mr. Pascrell and the
    Chairman and Ms. Velazquez raised about Internet taxation. The
    Internet community, the electronic commerce community, is not
    asking for different treatment that catalog orders, mail order
    orders, and other order that is being done across State lines.
    All that we are asking for is there not be special taxes put on
    the Internet.
        If you read the legislation which this Congress passed,
    with the support of many of you, and the mandate given to the
    commission which Governor James Gilmore of Virginia is now
    heading, nowhere is it suggested that people ordering over the
    Internet or suppliers selling over the Internet should be
    allowed to escape taxes, but they are being asked to be taxed
    in the same way as if you ordered something over the telephone
    or ordered something in a written form through a mail order
    catalog. That is what is interesting to us and that is the
    challenge that the commission faces.
        Thank you for allowing me to testify today, Mr. Chairman.
        [Mr. Miller's statement may be found in the appendix.]
        Chairman Talent. Thank you, Mr. Miller.
        Next, we are honored to have with us Professor Andrew B.
    Whinston. Here is a copy of his book, The Economics of
    Electronic Commerce, which I presume is available from
    bookstores or probably Amazon.com, for those wishing to order
    that way.
        Professor Whinston is the Director of the Center for
    Research in Electronic Commerce at the University of Texas at
    Austin in Austin, Texas. Professor Whinston.

       STATEMENT OF MR. ANDREW B. WHINSTON, DIRECTOR, CENTER FOR
    RESEARCH IN ELECTRONIC COMMERCE, UNIVERSITY OF TEXAS AT AUSTIN,
                               AUSTIN, TX

        Mr. Whinston. Thank you, Mr. Chairman, for inviting me
    here. I will be brief and dispel the myth that all professors
    are long winded.
        First, I will point out that if you want to buy a copy of
    my book, which I recommend, you would get a much better price
    over the Internet. And then the question on taxation, if you
    buy it from Amazon and most other on-line bookstores you
    wouldn't pay any taxes on it because the would be----
        Chairman Talent. Professor Whinston, Mr. Pascrell was just
    beginning to calm down and now you have gotten him excited
    again.
        Mr. Whinston. Well, unfortunately, I am going to come back
    to the taxation issue because I see his point, and we have
    raised that point in our book that taxation in a very broad
    sense is a real challenge.
        Chairman Talent. All right.
        Mr. Whinston. There is this idea that you go on the
    Internet and you have the whole world as your potential market,
    and I think that is, from a practical point of view, a myth. I
    think there is also a lot of talk about the Internet being a
    great equalizer; that is, the large and small are all equal on
    the Internet, and I think that is also a myth.
        The companies that we refer to, E-Bay, Amazon, Yahoo, they
    were all small businesses at one point, probably for 5 or 6
    hours, until they exploded, and it will be interesting, I
    think, to look at why and how these small businesses became
    almost instant, huge businesses.
        Let met mention some of the points that I think are
    critical in this area, which I think are a detriment to small
    business. One is the area of trust. Now, 99.99 percent of small
    businesses, I think, are very trustworthy but from the
    consumer's point of view, now I am going to talk about consumer
    to business, there is a recognition that there are more and
    more scams being developed on the Internet. The question then
    for consumer is should I go with a large recognized brand name
    or take a chance and go with a small business that is unknown
    to me? I don't have physical contact with that business, as you
    have in the traditional world where I can go down to the store,
    see the people in the store, look at them, look at their
    eyeballs, see how they appear and develop this sort of person-
    to-person trust.
        On the Internet you have no contact with the people. so
    there is a serious problem of trust, a problem of
    authentication, where individuals are running scams, can run 50
    scams with 50 different identities, have them close down and
    start up with 100 new identities. So these are things that
    result from the cryptographic technology.
        There is a question of how you get identified if you are a
    small business. We have portals that lead people to a small
    business but portals, as money-making businesses, charge for
    having you listed and listed at a high level in the portals. So
    if somebody is searching for a lobster store, you as a lobster
    company want to get listed first, you my have to make a deal
    with the portal. So that is a deterrent.
        Chairman Talent. Professor Whinston, just a minute and tell
    us what a portal is, please.
        Mr. Whinston. A portal is something like a mall in the
    physical world. So a portal is something where somebody is
    standing out in front of a store and everytime you go into
    thestore, you pay them a dollar. So it is just somebody standing out
    there collecting a fee and they are collecting a fee because they are
    telling you, if you want to buy shoes or lobsters on-line this is the
    place to go to. So they are bringing you to that place.
        We think of it as something like the equivalent of a mall.
    Yahoo, Excite, Lycos, these are all portals and they have
    power, especially for small business. Everybody who is in the
    Internet world knows about Amazon and all the other well-known
    brand names and they are marked on their browser. When it comes
    to finding something that is not a brand name, which may have a
    better price, the typical way is you would go to a portal. This
    is a problem, that portals are out to make money.
        Another point, going back to the taxation issue, and of
    course as pointed out it really reflects the way we treat
    catalog companies, so Internet companies in some sense is an
    automation, a higher performance catalog company. So all
    catalog companies to survive would have to go on the Internet
    and thereby getting that type of tax treatment. But even from
    the point of view of small business, if you are on the
    Internet, and we have some way of changing the tax system to
    make it more uniform, there will be a heavy cost to small
    business in dealing with the taxes, in collecting taxes because
    they have to maintain information on taxes all over the country
    or indeed all over the world.
        So the tax thing is really a multifaceted problem for small
    business as against large business, where they are able to
    handle this administrative burden more efficiently with the
    volume.
        Let me just briefly mention some issues of open standards.
    This gets into the question of the Microsoft issue, the Justice
    Department complaint. Microsoft is obviously a large company,
    and the other point of view that is really emerging is to look
    at Linux. Now I am mentioning Linux because you hear about it
    in the news but Linux is really the way, I think, small
    business will exist in the digital version of electronic
    commerce. That is, Linux is an operating system which is really
    a collection of individuals, of small businesses, who prepare
    components. So each business has a competency and a certain
    facet of the operating system field.
        Then as a buyer, you are buying a collection of components
    which are able to integrate. So the point for small business is
    that we have to ensure that as we move to the digital world of
    small business, entertainment, education, digital products,
    that we have open standards. That is, that standards are set by
    a consortium of groups involved in that business, including
    small business. The government should be very vigilant at
    ensuring that no one company gets access to and controls a
    certain standard and thereby, in effect, a certain industry. So
    I think that is an important policy area.
        There will be the growth of electronic money and that will
    raise issues of sovereign money versus electronic money. There
    will be a growth of cryptography, which will mean a basic
    problem of collecting taxes because transactions will be
    encrypted and you won't know whether somebody is sending a bill
    for a couple of million dollars for products or they are
    sending New Year's greetings to someone.
        All the information will be encrypted and only the company
    will have the ability to decrypt it.
        So finally I would make a pitch, as a professor, for more
    research in the area because research benefits small business.
    Large companies can, in effect, have Anderson Consulting or
    other large consulting firms do the work for them. The
    government should sponsor more research so we have a better
    understanding of how business on the Internet will operate so
    small business can draw upon that pool of information to be
    effective competitors in the Internet world.
        Thank you very much.
        [Mr. Whinston's statement may be found in the appendix.]
        Chairman Talent. Thank you, Professor Whinston.
        Our next witness is Mr. Alan Anderson, who is a Senior Vice
    President of the American Institute of Certified Public
    Accountants. Mr. Anderson.

    STATEMENT OF MR. ALAN ANDERSON, SENIOR VICE PRESIDENT, AMERICAN
        INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, NEW YORK, NY

        Mr. Anderson. Mr. Chairman and members of the Committee, it
    is an honor to be here today, and I would like to thank you for
    allowing the American Institute of Certified Public Accountants
    to make a presentation about a highly important and visible
    issue in the industry today, e-commerce.
        I would request that my testimony which I submitted be made
    a part of the permanent record, and I will summarize that
    testimony right now.
        First and foremost, Mr. Chairman, had SeafoodNow.com
    received the Web trust seal, you would have felt very
    comfortable and assured that you could have provided your
    credit card number over the Internet and the security of that
    credit card would have been maintained and, in fact, you would
    have received the product in high quality condition as well as
    fresh and very edible. I might say lobster is quite good.
        Chairman Talent. I should make myself clear, Mr. Anderson,
    candor requires me to say the reason I didn't supply my credit
    card was not that I was afraid of a lack of security but that I
    did not want to pay for the lobster.
        Mr. Anderson. I fully understand that. Thank you very much.
        Chairman Talent. Please, go ahead.
        Mr. Anderson. I am here today representing the 330,000
    members of the American Institute of Certified Public
    Accountants, of which many are either employed in small
    businesses today or small CPA firms.
        We believe that e-commerce provides a tremendous
    opportunity for small businesses today to grow and compete
    against their larger brothers and sisters in corporate America.
    We think that the WebTrust seal of approval and WebTrust
    assurance, if you will, is a vehicle which can provide for that
    competitive edge and competitive advantage.
        Customers entering the World Wide Web or the Internet today
    are scared. They are uncertain as to what's happening. They ask
    questions, how do I know who I am conducting a transaction
    with? Will I receive what I ordered? Is this a reliable
    business? Is it a secure site? Will my privacy be protected and
    will I get scammed?
        All of those questions are questions that every customer
    that goes on the Internet asks when they are pursuing and
    deciding whether they want to execute a transaction. In fact,
    70 to 75 percent of those customers do not execute a
    transaction for those very reasons.
        What we have done in the profession is to develop a
    service, CPA WebTrust, which is really a trust seal, which if
    you go to the Web, you see this seal, it provides you certain
    assurances. It follows the framework of that of an audit of
    financial statements. I think everybody could relate to an
    audit of financial statements. But what we do is audit that
    website for various pieces of information.
        One is the business integrity of the company and the
    business practices of the company transacting business on the
    Internet. We also do an audit of the transaction integrity,
    that will theintegrity of that transaction be maintained and
    assured so that that customer is protected and that the business is
    aboveboard, if you will?
        It also provides an information protection piece of the
    equation, which ensures the consumer's privacy, which is
    important both for the small business owner as well as the
    customer.
        We believe that CPA WebTrust is well positioned to help
    move the process forward, to help small businesses succeed in
    the marketplace.
        It has been said that the Internet is a large company venue
    to conduct business. In fact, in Business Week of May 1999,
    Jeff Bezos, the CEO of Amazon.com was quoted as saying, I think
    this is one of the most misunderstood things about e-commerce.
    There aren't going to be a few winners. There are going to be
    tens of thousands of winners. This is a big, huge, complicated
    space, and it is going to be as complex, with as much variety
    and as many winners as the physical world.
        We believe CPA WebTrust is there to help small businesses
    take advantage of the opportunities afforded them on the
    Internet.
        CPA WebTrust is a program that is international in scope
    for that matter. We have our international societies around the
    world, the United Kingdom, Australia, Ireland, Scotland, et
    cetera, also providing this service. CPA WebTrust is a program
    where you get licensed to provide this service. A CPA firm will
    then go into a small business, once they are licensed to
    provide this service, and basically audit that website.
        An interesting thing that we found as we have moved this
    process forward in CPA WebTrust is that many of the websites
    that have been put up in the rush to get on the Web, many
    websites have missed certain basic controls and control
    structures and processes which have prevented them from getting
    the seal.
        If we want to enhance and improve the quality of e-commerce
    on the Internet, if we want to enhance and improve the business
    success of small businesses, CPA WebTrust, I think, is well
    positioned to satisfy that need.
        Many people are always asking me, well, what is the cost of
    CPA WebTrust? This has got to be expensive because of the
    tremendous amount of assurances that CPA WebTrust provides.
        Well, the first website that was placed was a company
    called Resource Marketing in Ohio. I know there are some
    Committee members from Ohio. Resource Marketing is a small
    company that it cost them $1,400 to get the seal and about
    $5,000 in CPA fees to do the work. Within 60 days of the seal
    being placed on that website, Resource Marking maintains that
    their business grew by 300 percent and their cost structures
    went down by a tremendous amount, an amount to basically reduce
    their staffing levels or rechannel their staffing levels to
    that of one full-time equivalent.
        We believe CPA WetTrust is a tremendous vehicle to help
    position small businesses to be successful and compete in
    today's growing e-commerce marketplace.
        Thank you very much.
        [Mr. Anderson's statement may be found in the appendix.]
        Chairman Talent. Thank you. Our next witness, Mr. Brian
    Hanson, is the founder and owner of Hanson Brothers Fresh
    Seafood, in Portland, Maine. Mr. Hanson.

    STATEMENT OF MR. BRIAN HANSON, FOUNDER AND OWNER, HANSON BROS.
                      FRESH SEAFOOD, PORTLAND, ME

        Mr. Hanson. Thank you, Mr. Chairman and members of the
    Committee, for inviting me. I think I sit alone in a way that I
    represent the most basic of Internet businesses. I am a very
    small business that got on the Internet, and I am selling
    directly to consumers. So I am really running the most basic
    Internet model that you see on the Internet.
        Hanson Brothers Fresh Seafood, it is privately-owned by
    myself and my family. We have an extensive history in seafood,
    wholesaling, shipping, processing, but this is really our first
    real venture on our own into seafood retailing.
        Seafood selling is not the easiest business. The industry
    is fragmented. The product is highly perishable and it is
    competitive because it is so locally based.
        Because of our perishable products, we need to look at as
    many channels to distribute our products as possible so when we
    opened our retail we saw the Internet as probably the newest
    channel that we could use to sell our product in.
        We are fishermen. We don't know very much about the
    Internet, although I did have e-mail when I was in college. So
    I started doing some research, and I would really like to talk
    about the nuts and bolts of Internet retailing because I have
    gone through the process of choosing to go on the Internet and
    then actually going out and doing it.
        I really noticed three problems that small businesses have
    when they enter the Internet, and they touch on a lot of things
    that the other witnesses have talked about.
        The first problem is a poorly designed website.
    Unfortunately, every business out there is scrambling to get on
    the net, and that does not necessarily mean that they are
    making the right decisions to do so. There is an equal number
    of Internet providers that will offer you Web design
    capabilities. That does not mean that they can do that well. We
    see this in any industry. You are approached by vendors all the
    time offering services and products, but some providers are
    good and some are bad.
        Having a good website is inherently critical to being
    successful on the Web. You need to have a website that is
    friendly and attractive and easy to use. So we needed to
    address that problem.
        The second, and I think probably the most important, is
    lack of traffic or exposure. You can build the best website on
    the Internet but that doesn't mean that anybody is going to
    come to it, and this is the problem that small businesses
    really have.
        I didn't have a $40 million budget to advertise during the
    Super Bowl to brand my product. Up until recently, I didn't get
    a whole lot of media attention.
        There is really two basic methods that people get traffic
    to their Internet site. One is a branding campaign using
    traditional media and the other is getting on the portals or
    the search engines. That, too, requires an expertise that most
    small businesses do not have. So we need to address that
    problem.
        The third obstacle that most Internet businesses have to
    confront is a lack of functionality. As I said, a lot of small
    businesses are jumping on the Web but they have never asked
    themselves why they are doing that. They just say, I think the
    phrase was, you either have to play or pay. But unfortunately,
    few people actually are conceiving strategies to get on the
    Internet. Are they selling something? Are they offering product
    support? Are they offering information about their company?
    There are a variety of things you can do. The Internet and e-
    commerce is not just selling but you have to say to yourself
    what am I doing this for? Am I spending money without a
    strategy now where later on I will have to tear this all down
    and start all over again? The Internet is moving too fast to
    make errors like this.
        Those three problems are mutually exclusive. All three need
    to be addressed, and I did that.Unfortunately, I didn't have
    the resources, the skills or the time to do that myself and I was lucky
    to be approached by a company, Global Store, which had the search
    engine teams that could put me on the search engines, which had the
    website teams that could make in effect a website and had the capital
    that they were willing to build my website for me.
        Now, as a small business, I can honestly say I wouldn't
    have been as successful or maybe even successful at all had I
    not had that help. I don't have the economies of scale to do
    such things and I do not have the skills. I am not going out on
    a limb and saying most small businesses don't have the
    capabilities to truly be successful on the Internet without a
    lot of luck, and when I say small business I am going to say
    businesses such as mine that are doing a million dollars in
    sales and are locally based in a small community.
        To actually create our site took us almost three or four
    months, and again we wanted to make sure that our site was
    effective, it was functional, it was usable and it was without
    errors. So I missed an important holiday season.
        I opened up my retail store 8 months ago and I opened up my
    Internet commerce about 3 months ago. Now I started with zero
    sales on the Internet and right now the Internet is accounting
    for 25 to 30 percent of my sales. This year alone I will
    probably do $2 million just on my retail.
        Chairman Talent. I was going to ask you about sales volume.
    How much of an Internet volume do you have?
        Mr. Hanson. This year we are looking at doing about
    $600,000.
        Chairman Talent. Thank you.
        Mr. Hanson. And that was business that I wouldn't normally
    have.
        Now, besides addressing all the problems that I noted, I
    was also lucky enough to get in Time Magazine. So I am not
    going to tell you that it was all preparedness, and the Good
    Morning, America helped, too.
        Chairman Talent. We are all interested in your plan for
    getting such press. Several members of the Committee will be
    talking with you about it afterwards.
        Mr. Hanson. What the Internet has done for me as a small
    business is created a very important sales venue to move a
    perishable product. That is probably the most important thing.
        My inventory control is probably the single most important
    thing to the success of my business. I don't buy a lot of
    frozen product, which is typically the type of seafood sold at
    larger retail chains and grocery stores. I sell smaller, more
    specialized fresh seafood.
        The Internet has allowed me to reach an international and
    national market. There isn't a day that goes by that I do not
    receive inquiries from out of the country on either brokering
    wholesale deals or just shipping out lobsters to other
    countries.
        Thirdly, the Internet has provided me cash flows in slow
    months. January, February and March are not great months for
    any retail business. The Internet has provided me cash flows to
    really help a fledgling business survive and get through the
    first couple of years.
        Finally, it is a new profit center and it is one that has
    lower distribution costs than perhaps anything else. I also
    take orders via telephone, but to take telephone orders
    requires me to place someone at a phone and answer and talk to
    a customer.
        Now, the benefits of that are you can actually deal
    physically with a customer and talk to them, and I don't want
    to under emphasize how important that is. But unfortunately, I
    am a small business and if I can shift some of those telephone
    calls over to the Internet and also get new customers to the
    Internet, then it is better for me. It doesn't require the
    staffing.
        My effort and costs for developing the website were paid
    for by Global Store, and the shipping costs are paid for by the
    customer. So it is very low distribution. It is really opening
    another retail store without the start-up costs of one.
        Chairman Talent. Do you think if they called in on the
    phone, and you had a good person talking to them, they might
    buy more?
        Mr. Hanson. There is always that possibility. You can
    always either upsale or you can create a relationship with a
    customer to create repeat business, but, you know, during the
    holidays that phone could be ringing off the hook all day long
    and it might take three people. And I would rather shift those
    three people to working with the true core of my business,
    which is over-the-counter retail sales.
        We are firmly aware that competition is coming. I think
    that I have been lucky that I started in an Internet business
    that not a lot of people have jumped into. The perishable food
    Internet business is, they a few and far between. I think the
    only other one that is really, I think, doing any volume at all
    is probably one we all know, Omaha Steaks, but they have always
    had a national branding and they shifted to the Internet quite
    easily.
        We are expecting a lot of competition so it is very
    important for us to establish ourselves first and foremost as
    oriented towards customer service, to having a good website and
    making our customers feel as though they can confidently order
    product through our website.
        I think one of the things we talked about, seals of
    approval and all of that, but I know that if I don't service a
    customer well they won't come back, and ultimately that will be
    the death of my Internet business. So I have to go out of my
    way, even though I don't have that customer contact like I
    normally would, I have to go out of my way to make sure that
    every point of service is completed properly.
        I have actually--it is probably fair to say that 20 percent
    of my business now is repeat customers. Thank You.
        [Mr. Hanson's statement may be found in the appendix.]
        Chairman Talent. Thank you, Mr. Hanson. I am grateful to
    you for traveling so far.
        I am going to defer my questions because I know, I can tell
    from the attendance, that the Committee is interested and I
    want them to be able to get to their questions.
        In Ms. Velazquez' absence, I will yield to Mr. Brady.
        Mr. Brady. Thank you, Mr. Chairman.
        My concern is more security. I was interviewed by a major
    TV station in the City of Philadelphia, and this reporter had
    said to me that over the Internet there was an advertisement
    you can order drugs. I guess that you may not be able to give
    me an answer but maybe you can help me answer her a little bit,
    or maybe somebody--I could jog you a little bit and come up
    with something that I could say or maybe even respond to.
        What was happening was Ritalin, Viagra, Prozac were being
    ordered over the Internet, and they were being advertised as no
    prescriptions needed. This is a documented thing. It is right
    on TV, and it is playing every other day in my city.
        What happened was they had one drug, I don't know the name,
    long name, not even approved in the United States of America,
    but it was ordered out of Sweden, and she received this.
        The other three drugs, the Prozac, the Ritalin and the
    Viagra were ordered out of the State of Florida, and they were
    ordered from the city of Florida with a suite number. The suite
    number turned out to be a box number. And she received and was
    delivered to her, or to the person whowas ordering them, these
    four drugs; one not even approved in the United States of America yet;
    and again, advertised no prescription necessary.
        I don't know whether you can answer my question. I don't
    know if you can give me any insight. We went to the Federal
    authorities. Actually, I did because I needed some type of an
    answer. They are overwhelmed. They can't even begin to try to
    address this problem.
        But the two main problems, again, no prescription necessary
    and it was ordered by her niece, who was 10 years old. So I
    have a problem with that. I have a major problem with ordering
    over the Internet, and I understand what you are doing here is
    CPA approval, you know, let's let people, consumers, know that
    you are interested, you watch and you monitor this, it is a
    good thing to do, but I just think we need to look at this real
    hard.
        No disrespect to the business that is now becoming no more.
    You have got to go to another Committee, you don't come to
    Small Business anymore, you are going to be big business,
    hopefully. We don't want to hurt you, but there are some
    concerns, and this is my concern. I don't know if any of you
    can help me with any kind of direction to this.
        Thank you, Mr. Chairman.
        Chairman Talent. Perhaps, Mr. Miller, would you like to
    take a crack at that, or Mr. Hill, maybe?
        Mr. Miller. Clearly, Mr. Brady, any kind of global commerce
    where people step outside the normal channels of ordering
    prescription drugs, they can do it through the telephone, they
    can do it by traveling outside the country, they can do it
    through mail order.
        Mr. Brady. A 10-year-old could do it by traveling outside
    the country?
        Mr. Miller. They could do it by telephone. It happens all
    the time.
        Mr. Brady. You can order a drug by a telephone?
        Mr. Miller. You can.
        Mr. Brady. With no prescription? A 10-year-old could do
    that?
        Mr. Miller. Yes, you can. I hate to tell you that, but as
    long as that 10-year-old has access to his or her parents'
    credit card--now, one hopes the parents don't give a 10-year-
    old access to a credit card. Obviously, when you are ordering
    something, sir, at the end of the day you have to pay for it.
    People don't send you drugs or any other product over the
    Internet on approval. They require you to pay in advance.
        So I think the real critical question here is how a 10-
    year-old got his or her parents' credit card, because
    presumably he or she could have ordered all kinds of things
    that you wouldn't want a 10-year-old to order. So I think at
    some point or another there has to be some personal
    responsibility here, because the same things you just detailed
    can be ordered through all kinds of ways if you have a means of
    paying for it. That is the critical issue.
        Mr. Brady. So what you are telling me is that it is okay to
    order Prozac?
        Mr. Miller. I don't think it is okay at all.
        Mr. Brady. It is okay to order Ritalin, it is okay to order
    Viagra?
        Mr. Miller. Absolutely not.
        Mr. Brady. As long as your parents give you the credit
    card? You are 10 years old, and she stumbled on the Internet by
    using a computer, so that is okay?
        Mr. Miller. Mr. Brady, obviously I am not saying that. I am
    saying that----
        Mr. Brady. That is what I heard.
        Mr. Miller. Absolutely not. If you are going to try to stop
    international commerce, you have to stop the ability of people
    who do not have the age of responsibility to make those kinds
    of decisions. You can't cut off telephone service to those
    countries. You can't cut off Internet services. You can't cut
    off mail service to those countries.
        So what I am saying is the problem you are trying to
    identify is not unique to the Internet. What I am concerned
    with is you are portraying it as if this is somehow unique to
    the Internet.
        Mr. Brady. I wish you would answer that TV reporter like
    that and see what would happen.
        Mr. Miller. I would be glad to. I get those questions all
    the time.
        Mr. Brady. I am sure you would be.
        Mr. Miller. Okay.
        Mr. Brady. What I am saying to you is that a kid is on the
    Internet.
        Mr. Miller. Right.
        Mr. Brady. And they are playing around and they are doing
    their computers. They are all taught it in school, and here
    they bump into this no prescription necessary.
        Mr. Miller. Right.
        Mr. Brady. And here they bump into a chance to be able to
    order drugs that you need a prescription for, which is illegal
    to do already.
        Mr. Miller. Right.
        Mr. Brady. And now this person who is receiving this order
    doesn't know who they are receiving an order form, it is a post
    office box, and a 10-year-old, what happened, as you all know,
    she went to her aunt who is a TV reporter, and she said, look,
    I will give you my credit card. Let's see how far we can get
    with this. And that is how far they got with it.
        I just think there is something wrong with that. It is a
    little different from ordering over the telephone.
        Mr. Miller. I am not quite sure what the difference is,
    sir, with all due respect.
        Chairman Talent. Does the gentleman have any further
    questions?
        Mr. Brady. No, I am finished.
        Chairman Talent. Okay. Mr. Hill, your questions lead me to
    think that maybe we should have had somebody from the
    Department of Justice here to talk about these kinds of
    concerns.
        Mr. Hill, have you, on behalf of the agency, networked at
    all with the law enforcement people? Mr. Brady's comments
    certainly disturb me, since it seems by saying we are
    overwhelmed; we are throwing up our hands and not doing
    anything about this. I mean, that is really a source of
    concern. Do you have anything you want to add?
        Mr. Hill. Well, just very quickly. You know, personally I
    share many of the same concerns. I have an 11-year-old daughter
    who can operate my personal computer on the Internet in ways
    that just amaze me, and every time she get on, about every
    other time I go in an remind her, don't give your name out,
    don't use my credit card. I keep working on that over and over
    again, because there is a real problem.
        In addition to working at the SBA, I engage in what I
    considered a small business activity. I fish professionally in
    bass tournaments. I do want to assure you I am not leaving the
    SBA any time soon. My wife tells me I have bankrupted the firm
    several times. But I am currently selling my boat on the
    Internet, and I am getting inquires from literally all over the
    country, but because they are over the Internet I don't know
    where they are coming from. I don't know who they are. I don't
    know if they are serious, if they are pranksters. We all read
    not too long ago about the E-Bay sale, that there was a
    youngster who got on who was buying cars, and he almost bought
    a resort island.
        There are a lot of concerns like this.
        I think what Professor Whinston said earlier is what the
    SBA thinks is very important. We need to do a lot more
    research. Part of our emphasis at the SBA begins with focus
    groups that we hope to run this summer with the Department of
    Commerce, where we need to actually explore all of these issues
    and understand them.
        This is a brand new world. It is moving very fast.
    Technology is going a million miles an hour, and we need to
    catch up and see where we can be helpful. But there are a lot
    of concerns like that that we need to work on.
        Mr. Miller. Mr. Chairman, maybe just two more general
    points to Mr. Brady's specific point. One is the issue of
    security, and I think in terms of security on the Internet,
    most people when they send their credit cards over the Internet
    can feel fairly secure because of what is called the secure
    socket layer of the security issues.
        There is a second issue, which is authentication, which
    Professor Whinston referred to, which is you are who you say
    you are. To some extent that may address Mr. Brady's concern
    that at least when you are filling these questionnaires out, if
    you say 18 years old, how do they really know you are 18 years
    old?
        Then these is a third question about consumer fraud and
    scams, which Professor Whinston also talked about, which the
    AICPA program, BBB On-line, Trustee and other programs, but I
    don't agree with--don't know who responded to Mr. Brady from
    the government, but I don't agree that the government isn't
    able to deal with consumer fraud or other opportunities.
        I talk to the FTC all the time. They recently had a
    meeting. They have another one coming up June 8th and 9th. We
    talk to the Department of Justice all the time. We talk to
    state attorneys general. Number one, they tell us the numbers
    of consumer fraud on the Internet compared to general consumer
    fraud is still infinitesimal. People doing fraud still use the
    old fashioned way, by and large. But that is not to say it is
    not important because obviously it reflects badly on the
    industry.
        So what we are trying to do is work with organizations like
    the AICPA, with BBB On-line, with Trustee, to be able to deal
    with that challenge so that there is a general answer. I can't
    deal with every specific problem that comes up because
    obviously no matter how good you try to set it up there are
    always going to be scam artists that are always going to out
    scam the system.
        The last point I would make is that most of the access to
    the Internet providers, AOL being the most prominent but it is
    also true with others, are trying to put parental control
    systems built into the system. I think that that is important.
    It is becoming a market differentiator because they want to
    know that if I as a parent turn the Internet over to my 11-
    year-old or 10-year-old, my kids are now 15 and 17, then I am
    able to set that setting on the computer so that they cannot
    access certain websites that contain sex, violence; they cannot
    order any materials unless I explicitly come on. So those
    settings are very, very important. I think that is a market
    differentiator when parents are out there buying software or
    deciding which Internet access provider to use, and the
    Internet providers are advertising that to parents, come and
    use our website or use our portal or use our access because we
    can offer those protections to try to minimize, I am not going
    to say eliminate but try to minimize the kind of situations
    that Mr. Brady was talking about.
        Chairman Talent. Well, thank you. I appreciate Mr. Brady's
    questions. I think we can expect the market on its own to take
    pretty effective steps to protect people against pilfering of
    their credit cards because if they don't, any company that
    isn't doing that is going to lose business. So there is a
    tremendous incentive, and Mr. Anderson talked about them.
        I expect that the market will respond pretty well on its
    own to that, but the issue where the person is not being
    defrauded, they are getting what they ordered and the problem
    is it is a kid ordering, I mean, there is much less incentive
    for the market to respond to that on its own, and that is an
    area where I do think the government needs to be involved, and
    I think Mr. Brady made some excellent points.
        Bob, if you will let us know who in the DOJ threw up their
    hands and said that we are overwhelmed, I would be interested
    in knowing that because they ought to be letting us know that.
        Mr. Brady. We followed that up and they went and they found
    out that the suite was a post office box; they confiscated it
    and they shut that down.
        Chairman Talent. Good.
        Mr. Brady. But the initial person said that, and I didn't
    follow up with that. No question.
        Chairman Talent. Okay.
        Mr. Brady. I didn't mean to be argumentative with you.
        The 10-year-old was probably done--no disrespect to
    reporters but you all know how you are--was probably done for
    effect. I am sure that she stumbled on it and let the 10-year-
    old now actually do the manipulation of the ordering so it can
    be effective when she does her TV show. But the reality of it
    is that it was done with no prescription, advertised and no
    prescription needed. Thanks.
        Chairman Talent. I thank the gentleman. I will recognize
    Mr. Forbes.
        Mr. Forbes. Thank you, Mr. Chairman. I sincerely appreciate
    you conducting this hearing today.
        For me, I think this is a tremendously exciting opportunity
    for America's small businesses. Probably no opportunity like it
    has ever come before small businesses in the last century, and
    I think there are great things ahead.
        I respect Mr. Brady's concerns. I absolutely share them. I
    would just make this one note, though, and I think it is in
    line with what has been said here by Mr. Miller and others, is
    there are Federal agencies who are charged with the
    responsibility of making sure that kind of fraud does not
    happen, and we need to give them the tools to extend that kind
    of oversight on the Internet as well.
        As was mentioned, telephone solicitation, telephone sales,
    this is an area that obviously has gone on for decades and it
    is a tremendous concern, I think with the ease of the Internet
    and we are talking about ease, notwithstanding parental
    controls that many of the major search engines are providing,
    that it is an area that I think it is rightful that the
    government take some sensitivity to.
        The United States Postal Service, frankly, has jurisdiction
    there and it is a violation to order internationally without a
    prescription. So there are some violations of law here that
    exist that our Federal Government and its various agencies need
    to be sensitive to, and to the extent that this Committee can
    help provide some guidance on that as we move into this brave
    new world--we all know over the last 5 years exponentially the
    growth here has been phenomenal. My wife, my children, our
    family, are active users of the Internet and of this e-
    commerce. Frankly, we have found it to be just phenomenal.
        If you come from an area like I do in eastern Long Island,
    which is largely rural, which is a seasonal economy, this
    tremendous opportunity, as Mr. Hanson has suggested, provides
    you a marketplace that you would never, ever have access to. It
    provides for an expanded local economy, and there are only
    great upsides, I think, to the growth of this, understanding
    that wedo have to be mindful. As my good friend from New
    Jersey, Mr. Pascrell alluded to, you do not want to create an
    atmosphere where frankly those who are smart enough to get into the
    Internet world and e-commerce are somehow advantaged over those who
    have made investments in a physical plant, who are paying business
    fees, who are paying local taxes. I think that as much as I ran on and
    believe very much in a strong tax reduction policy, I think we have got
    to keep the playing field level and make sure that we don't advantage a
    firm like Amazon.com while we are putting others who sell books who are
    not on the Internet to a disadvantage.
        So I think there are some areas here we have to deal with.
        Let me, if I might, Mr. Anderson, you talked about
    something that I found extremely exciting and, frankly, gets to
    the issue of trust, as has been raised here, the whole idea of
    CPA WebTrust. Now, are you saying to me that the American
    Institute of Certified Public Accountants has the technical
    expertise to not only certify, if you will, the financial
    health of the entities that you go in and you give the seal of
    approval to, but you also have the technical expertise to
    certify the technological security of these websites?
        In other words, for example, you go to Mr. Hanson's firm
    and you basically give him the seal of approval because you
    have certified that he has the financial health, he is not some
    guy working out of the back of a truck that is leaving town and
    he takes orders and never fulfills them, but in fact you have
    certified that he has a secure website where you can use a
    credit card, where you don't have to worry about whether your
    credit card has all of a sudden been copies by a thousand other
    hackers with access to that website, who take that credit card
    and use it for other things?
        Mr. Anderson. Actually, yes, we do. We have 330,000
    members, and not all 330,000 members have the technical
    expertise.
        We license firms, small firms and large firms, to provide
    this service. What happens is, it usually will take a team of
    people to certify the website, one with a technical skill set.
        One firm that is licensed is a firm out in California and
    it is a one-person firm, and this CPA has the full complement
    of skills to do the technological piece of the equation, as
    well as the examination of the balance of the business
    principles that the company is saying are in place. We provide
    the training. You have to have training in order to get the
    license, and so we are building the technical infrastructure to
    support this seal program.
        Mr. Forbes. I just want to make crystal clear in here,
    because much like a consumer might see the good seal--the seal
    of approval of Good Housekeeping, or whatever they call it, and
    it gets consumers frankly to go to some of those businesses,
    what you are saying to me is when your seal is placed on a
    business, that the consumer knows that technologically there is
    no fear that somehow encryption can be violated; that there is
    a hacker who can get in there and steal those credit card
    numbers that are in the process of being filed with perhaps a
    seafood company or Amazon.com or any other?
        Mr. Anderson. I would say that there is no fear.
        Mr. Forbes. Well, that is I think a great advance, and I
    appreciate that on the private side that the private sector,
    frankly, has moved in this direction because that is really
    what we need.
        I was going to ask Mr. Miller about that a little bit and
    how his industry feels about that, but that is probably the
    single most--and Mr. Hanson, if you could comment on this in a
    second, but it is probably the single most concern about all of
    us who see a great opportunity on the Internet, something we
    want to buy, you go through the whole process and then it says,
    click, you know, to send that credit card number, and I will
    admit that I am one of those who has said, you know what, I
    think I will print this out and then I will call on the
    telephone Mr. Hanson and order those lobsters, just to make
    sure that my credit card is not going in this vast netherworld
    out there for others to take advantage of.
        Mr. Hanson, could you just perhaps, and I apologize for the
    TV that is separating us here, but could you comment? Do you
    find that there are perhaps a majority, or close to a majority
    of your customers, that are going the full menu, seeing what
    you have to offer and then picking up the phone, again because
    they had that last remaining concern about security?
        Mr. Hanson. No, that absolutely happens. I would say
    probably 10 or 15 percent of our customers will either put
    their order through and then call us to make sure it actually
    was processed, just to be sure.
        Mr. Forbes. Do you have one of these seals of approval that
    the CPA Web masters talked about?
        Mr. Hanson. Actually, this is the first time I have heard
    about it, but it sounds like a great idea. We use VeriSign,
    which is one of the industry standards for credit and
    encryption, ordering encryption. So we feel comfortable with
    our security, but obviously any other approvals, we can get, a
    some sort of overview, we are going to look at.
        But there are still a lot of customers out there that feel
    very comfortable surfing the Internet and looking at price
    comparison but still do not feel comfortable taking that final
    step of actually sending their credit care number over that.
    And we probably get 10 to 15 percent of our orders that will
    look at our website, print something out and then just call us
    and place the order that way. And then that is fine. It is
    going to take a while for people to feel comfortable.
        I personally think the technology is there to make
    transactions safe. I do a lot of my purchasing on-line, but
    everybody is different.
        Mr. Forbes. Mr. Miller, could you just comment, too, and
    maybe clarify for me, because I was not aware of what your
    industry, ITAA, does, again, to put build that trust that this
    is a secure transaction.
        Mr. Miller. It is absolutely critical. We don't have our
    own certification program because we do believe a lot of other
    products are already out there. And clearly, businesses doing
    business on-line have come to realize that, number one, privacy
    is a major concern, which is why the Georgetown survey, which
    was released approximately 2 weeks ago, Mr. Forbes, indicated
    the number of heavily traveled websites that now have a posted
    privacy policy is around 90 percent; whereas, last year it was
    around 15 or 20 percent. There has been that dramatic shift
    because the marketplace is responding to consumers' concern
    about privacy and now they have a privacy policy posted.
        Mr. Forbes. If you would yield just for a second.
        Mr. Miller. Sure.
        Mr. Forbes. But don't we run the risk, if we get into a lot
    of multicertification situations or we have upwards of dozens
    or even hundreds of different certifications, that the public
    gets very confused about really what certification is the real
    certification?
        Mr. Miller. I think that there are not going to be dozens
    or hundreds. I think you are going to see a relatively small
    number because there is going to have some heft behind the
    branding itself.
        Mr. Forbes. Some standards set?
        Mr. Miller. Exactly.
        Mr. Forbes. Would your industry set those standards?
        Mr. Miller. I don't think we would want to set them. I
    think we would want to work with our customers and with
    organizations like and AICPA. I don't think the IT industry
    itself wants to set them.
        Mr. Forbes. Why wouldn't we want to have basic, basic
    standards that the public can say, well, if you are meeting
    these basic standards then I know I can feel assured that there
    is privacy and security in my transaction?
        Mr. Miller. We do have standards various technologies. For
    example, as Mr. Hanson said, VeriSign is a commercial industry
    product which is widely recognized as being secure in terms of
    protecting the financial transaction, which is one of the
    things you are very concerned about. That is a commercial
    product. It is not agreed to by industry. Industry has worked
    in the credit card area. You may have heard of the set process
    where MasterCard and Visa have been working to set up
    standards.
        It has been widely adopted in Europe, not so widely adopted
    in the U.S., but I think the feeling of the industry is this is
    an industry of constant change. We don't want to be so
    pretentious or so obnoxious as an industry association to claim
    that we can dictate those standards.
        Let the marketplace evolve. I think you are going to see
    very few----
        Mr. Forbes. I do appreciate where you are coming from.
        Mr. Chairman, I would suggest, as somebody who believes
    there should be as minimal government intrusion into this area
    as possible. I have already acknowledged that there are some
    rightful areas that the government should be involved in, and
    before the government actually decides what standards, because
    I think the escalating--it is exponentially growing as an
    opportunity but it is exponentially growing as a site of fraud
    and abuse. I think before the government is forced to set
    minimum standards I would think the industry would want to
    seriously look at setting their own core, basic standards.
    Thank you.
        Mr. Miller. I will take that back to my membership, Mr.
    Forbes. Thank you.
        Mr. Forbes. Thank you, Mr. Chairman.
        Chairman Talent. I thank the gentleman for his interest. We
    only have a couple of other members, and I will certainly be
    happy to have a second round of questioning if he wants to
    stick around and ask some others. I am going to try to clean up
    on some issues but I would be happy to have him do it.
        Next, Mrs. Napolitano.
        Ms. Napolitano. Thank you, Mr. Chair.
        A lot of the questions that I would have, having been a
    small business women myself and coming from local government,
    stem out of the fact that for a long time small businesses
    faced quite unfair competition from catalog sales. Now we have
    Internet sales.
        Understand that in a small community that is using sales
    revenue for its base budget, that if there are no tax revenues
    coming in from the businesses that operate within its
    boundaries, things happen. There is just enough money flowing
    into the coffers for the local community to do its job for the
    community itself.
        How would you think, because I do not believe that you pay
    any local taxes as yet because all of yours is done on the
    Internet, in cyperspace, but how do we in all fairness to
    business, in all fairness to the communities that you reside
    in, deal with this issue of being able to pay into the coffers
    that small business that are physically located, do business
    face-to-face, have to pay to the local coffers? Anybody?
        Mr. Miller. I think the answer is a couple of fold, Mrs.
    Napolitano. I think, number one, the amount of growth of the
    Internet industry itself, and the way it is driving our
    economy, as has been documented by the Department of Commerce
    and others, has in itself given for the first time ever
    consistent Federal budget tax surpluses. States are now
    wealthier and have bigger surpluses than they ever have.
        Ms. Napolitano. Do you know what the problem, sir, is? And
    I hate to interrupt you. Having served as in the State
    legislature, the government takes from the local coffers to
    balance its budget and so the community really is crying for
    those extra dollars.
        Mr. Miller. I haven't gotten to the local government
    because I know that was your specific concern was the local
    government.
        Ms. Napolitano. That still is.
        Mr. Miller. I think at least at the Federal level and even
    at the State level, I know many of the governors were concerned
    about the Internet Tax Freedom Act passage and its potential
    negative impact on those States which have high sales taxes. I
    think the arguments have been somewhat undercut by the reality
    that they are just sitting on these huge budget surpluses.
        The local governments, I think, have a couple of different
    issues they have to address. Number one, whether in the digital
    age, whether their traditional taxation models are going to
    continue to work. And I think that is what the Internet
    Commission that Governor Gilmore is heading up is going to have
    to examine. I wouldn't pretend to have an answer to that, but I
    think that that is one of the fundamental issues that is going
    to need to be addressed.
        Number two is, there was a very important decision, Sunday,
    several years by the Supreme Court, the so-called Quill
    decision, which really determined the whole issue of taxation
    and site of your business. Whether the Internet came along or
    the Internet didn't come along, it is that Quill decision which
    allows catalog firms or other firms which do not have sites in
    a particular State or locality not to pay taxes. So I think
    that is the kind of more fundamental baseline issue which the
    Internet Commission is going to have to take a look at, whether
    that Supreme Court decision is underlying it.
        Last but not least, the activity, I would contend, and
    again there can be disagreement, but our industry would contend
    that the economic activity generated in places like California,
    Virginia, North Carolina, Missouri, Pennsylvania, et cetera,
    this growth of the economy is generating so much economic
    activity that it has to be benefiting those localities, whether
    you talk about inner cities in New York, parts of New York,
    that were very run down a few years now, now it is called
    Silicon Alley, I believe; whether you are talking about inner
    cities which are now becoming wired and new technology brought
    into the schools; Cisco Academy now operating in 1,400 inner
    city schools across the United States.
        That doesn't totally answer the specific question of well,
    what about my one dollar of taxes I was collecting before, but
    I think if you look at it in a larger context we would argue
    that the benefit to local government of the general activity of
    the Information Technology Age and the general benefit it
    brings to the community far outweighs maybe one dollar of taxes
    that a particular small business may not have gotten.
        Last but not least, I would contend that if you get more
    businesses like Mr. Hanson, I think his example is--while it is
    exciting, it is not unique. In fact, there are tens of
    thousands of businesses doing this every day. He pays his
    employees; he pays more taxes locally on his business; and that
    generates economic activity. I think any community would love
    to have many more Mr. Hansons, who continues to have a retail
    operation, as I understand it, locally, as well as the Internet
    business. And that can only benefit the community, and that is
    the way to look at it,in my mind, in the digital age.
        Ms. Napolitano. Well, the first comment you had, we found
    out trickle down economy does not work. I mean, by the time it
    gets to the local communities, it just isn't there.
        You are right, I think there are many, many ramifications
    to whether the business has an on-site, in addition to the
    cyberspace site, whether or not it is going to benefit the
    community, but I think the community itself needs to understand
    that there is an impact on the community. If it is totally just
    cyberspace, then something has to be done to be able to allow
    the community to benefit from that, if they are headquartered
    or if their business is located within the framework of that
    community.
        There are many other things that I would like to ask. Do I
    have time?
        Chairman Talent. I would encourage the gentlelady to ask
    another question.
        Ms. Napolitano. Thank you.
        Chairman Talent. We may actually have a follow-up hearing
    on this because you have raised tax issues, and Mr. Miller has
    done an excellent job responding, but it might be interesting
    to have other witnesses on that and also on the law enforcement
    issues.
        Members are interested in what you are asking about so
    please go ahead and ask.
        Ms. Napolitano. Thank you very much.
        Professor Whinston, it appears you are not really
    particularly optimistic on small business will be able to
    compete in cyberspace. In your testimony, Phil Sisenbrand, a
    name familiar and already important, will be even more of a
    factor in driving economic decision-making. But do you have any
    suggestions that small business could follow to ensure their
    continued ability to compete and be able to be successful?
        Mr. Whinston. Yes. As you indicated, what we have seen in
    the data, and we are collecting data about Internet activity,
    is that we see thousands of small businesses on-line, let's
    say, selling books or CDs, but very few of them do any
    significant business. The business is really concentrated in a
    few very large companies, and I think that is going to be a
    problem for small business.
        So my suggestion, or the suggestions that we have
    considered, relate to this issue of research, meaning that we
    have a body of knowledge that small business can draw upon so
    it can become effective and in many cases may end up to be
    leaving the category of small business to medium or large
    business. So it may be that we are entering a world where being
    small, except if you have a very special niche market that
    people need, is not going to be sort of a viable, long run
    alternative. You are either small and then you grow to medium
    or large to handle all of the technological issues--even if we
    figure out a way of doing the taxation, I go back to my point
    that the costs of managing the payment of taxes, the
    recognition of what taxes should be charged, will become a
    major cost to small business as against a larger company that
    can really amortize that cost over a larger base.
        So I see a big challenge for small business in this
    Internet world.
        Ms. Napolitano. Thank you, sir.
        Thank you. I will hold for the next round. Thank you.
        Chairman Talent. Would any of the other gentlemen on the
    panel like to respond? It was another excellent question. Are
    the rest of you as pessimistic about the chances of small
    business? Well, let's jump in there.
        Ms. Miller. Obviously, I disagree with everything Professor
    Whinston said after he said ``the.''
        Basically, I believe that the opportunities are incredible,
    as Congressman Forbes said. I mean, the fact that now virtually
    anybody who wants to sell to General Motors can sell to General
    Motors, for example, 5 years ago if you were a supplier and you
    wanted to sell to General Motors you had to become part of
    their electronic data interchange, private network. You had to
    go through all kinds of rigmarole and it was not worth it
    either to General Motors or to small business manufacturers who
    manufactured parts to try to go through that, because they had
    a very small cluster. The same with Ford, the same with Daimler
    Chrysler.
        Now because of the Internet and the automotive exchange
    network, virtually anybody who wants to supply a part, a seat
    cover, a bumper or whatever it is you want to manufacture, now
    has the opportunity to sell to the largest car manufacturer in
    the world and become a regular supplier.
        That also means, as Mr. Hanson suggested, if you don't do a
    good job once you get that opportunity, the word gets around
    the Internet pretty quickly and you are going to lose that
    contract. But thousands of manufacturers, mostly small
    businesses or medium-sized businesses, who never could have
    dreamed to selling to General Motors, now can do so.
        The same thing with companies like Wal-Mart. Before, it was
    a relatively small number of middlemen, middle manufacturers,
    who could do business with Wal-Mart, because Wal-Mart had to
    touch you and feel you and see you and go through this whole
    big formalized process and you had to have a big private
    network.
        Wal-Mart now is out there on the Internet. Anybody who
    produces goods and services they are looking for, salt and
    peppers shakers, skirts, shirts, tennis rackets, whatever it
    is, you can electronically deal with Wal-Mart. As long as they
    know you are a reliable supplier, you can suddenly do business
    with them.
        I think the opportunities are what I focus on; not to
    minimize the challenges. Some of the ones that he identified,
    that Professor Whinston identified, are true but they are being
    dealt with in the marketplace, and they are being dealt with by
    appropriate government laws and regulations. But to sit here
    and talk about these problems as some kind of overwhelming
    obstacle to small businesses, I think, is just turning the
    glass not just half full or half empty, totally upside down.
        I think if you have a hearing a year from now, you will
    have 10 Mr. Hansons here, and 2 years from now you will have
    100 Mr. Hansons here. Now, maybe he doesn't want to have a
    hundred competitors on the Internet selling lobsters, but that
    is what is so exciting about the Internet.
        One other thing that I don't think the Committee has heard
    about fully is again the power of communications. Yes,
    Amazon.com is a great company but Amazon.com didn't exist 3
    years ago or 4 years ago.
        I will tell you the other thing about Amazon.com, if they
    don't do a good job, they could be dead tomorrow because if you
    go to a restaurant and you get a bad meal, it happens once,
    maybe you tell a couple of friends but it is going to be years
    and years before the word gets around that that restaurant has
    kind of gone downhill.
        You get bad delivery from Amazon.com from a few customers
    on the Internet and the word will spread like wildfire, and
    before you know it no one will be ordering anything from
    Amazon.com.
        So their emphasis on quality and service and reliability to
    the customers has to be paramount, has to be at the top of
    their agenda, because if they can't have comfortable customers,
    the Internet which made them will be the Internet which kills
    them.
        Mr. Hill. If I could just say, you know, I totally agree
    with Mr. Miller's assessment.
        We have been focusing on some of the external challenges.
    We think there are a lot of internalchallenges for small
    businesses to transform themselves to meet the challenges offered by
    electronic commerce. But one point I would like to leave you with, as
    you look at the Internet and you look at studies, we have talked today
    a number of times about our daughters. When that generation gets to be
    the consumer generation 10 years from now, the barriers that many
    people face now won't be there. The young people of today are growing
    up computer literate, and this is the way of the future. We think the
    opportunities for small business and the leveling of the playing field,
    both domestically and internationally, are just staggering. That is why
    we think this is going to be a major issue at the SBA for the near
    future.
        Chairman Talent. One more question, and Mrs. Kelly has been
    very, very patient. Mr. Hanson, you mentioned in your statement
    that you felt like the big players always have an advantage
    going in. Do you want to offer an opinion on this?
        Mr. Hanson. I have got a lot of opinions on this, actually,
    if you will give me just a minute. I agree with what everybody
    is saying, to some extent. It is my belief that the ability for
    a traditional retailer, business-to-customer, as a stand-alone
    small business to succeed on the Internet is diminishing
    rapidly.
        In real practical terms, to succeed on the Internet, the
    phrase we use is you have to bring the eyeballs in. It is all
    about traffic.
        The first model of the Internet, and we are shifting that
    and you will see it in the valuation of stocks, the first way
    we valued stocks was how much traffic. Now we are looking at
    how much of that can be converted to business. But the very
    essence of it is traffic to your site, and a very small
    business that gets on the Internet, if it makes no alliances,
    has no capital and it doesn't have the technical expertise to
    get on to the search engines, will not get anybody to their
    site, except maybe a few local customers, and then they will
    just languish on the Internet.
        The bigger sites, I mean, we see it, there is not a day
    that goes by that I do not hear on the radio or see on the TV a
    company, a brand new company, with millions of dollars,
    creating instant brand recognition. Go.com is doing right now,
    and every hour on TV you can see them. They are a brand new
    company. Amazon.com did the same thing.
        I can't to that. So I had to align myself with a larger
    company that had the technical expertise and the ability to
    bring me the eyeballs, or I wouldn't have succeeded, either.
        The Internet has so many different possibilities and so
    many different business models, not just business-to-customers.
    It is also the exchange of concepts, and there is so much to
    it. I mean, we are seeing now webcasting and the ability to
    transmit audio and video signal, that there is tremendous
    opportunity out there, I wouldn't disagree with that. But
    traditional, small business retailers, unless they can get
    traffic to their sites, won't be successful at all.
        Chairman Talent. All right. I will give Professor Whinston
    an opportunity to respond later, but right now I want to
    recognize Mrs. Kelly, who has been very patient, for any
    questions she may want to ask.
        Mrs. Kelly. Thank you very much.
        The first thing I want to say is I thank you, Mr. Miller,
    for recognizing Silicon Alley. It is my district. I represent
    the world headquarters of IBM.
        When I came to Congress in 1994, we had 30 small high tech
    firms and less than four of them were Web focused. Today there
    are 113 small firms and, of these, 70 are Web focused. So we
    are growing very slowly but it is coming. It is a very exciting
    process for me to see that happen.
        I wanted to ask Professor Whinston, you were talking in
    terms of the taxing issues about the issue of sovereign money.
    I wonder if you would be willing to develop that issue a little
    bit because I think it is a serious one that could be
    problematic.
        Mr. Whinston. Yes. To do business on the Internet now the
    model is to use credit cards. As we move towards sort of a more
    mature movement in electronic commerce, there will be more and
    more interest in having electronic money that is in effect
    private money.
        So, for example, Microsoft could issue money and that money
    would be used to settle transactions anywhere in the world; the
    money would, in effect, be international money. It would be
    technically a liability of Microsoft, but it would circulate so
    it could be a liability that nobody would ever ask to get
    redeemed, and it, in effect, could become a very profitable
    business; in effect, a more profitable business than their
    current software business.
        So electronic money is really a digital product. It
    involves encryption. It gives you anonymity that you have with
    cash. So, again, it raises the specter of the sovereign money
    being partially displayed. It raises broad issues on monetary
    policy.
        The Federal Reserve is always very concerned about the
    growth in money supply and other issues related to that. If we
    introduce this new kind of money, it makes that issue
    confusing.
        The Federal Government makes money on issuing money. It is
    a couple of billion dollars in contributions to our Federal
    budget, and that could be displaced.
        With the electronic money, in effect, you could be doing
    cash transactions which are in the millions, which raises
    questions again about, as you have indicated, taxation, and
    that, again, would be a problem.
        So as everybody has indicated here, there are great
    opportunities. I run a center at the University of Texas and,
    of course, I see tremendous opportunities in electronic
    commerce but on the other hand I think we have to understand
    there are great challenges. In those challenges, an opportunity
    mixture, we have to work it out so that the positive end of
    this whole revolution is where we are going and avoid the
    pitfalls.
        I would also mention parenthetically, since I referred to
    cryptography, that it is not, in my judgment, possible to give
    guarantees about security. I think the AICPA or other
    organizations have to deal with reasonable care, and an
    indication that while nothing is absolute that companies have
    taken the kind of care which reflects a judgment that will, in
    most cases, protect security.
        But, for example, in our research center, we have gotten
    destroyed by hackers. Hackers have broken into all the security
    features we have and have destroyed our files, have knocked us
    out of business for weeks, because you are dealing in an area
    where the people who are hackers are very creative people. They
    are sort of like the Dr. Moriarty in the Sherlock Holmes cases,
    usually very brilliant people who have a certain personality, I
    could say, that they like to exhibit in this way, and this
    becomes a real problem.
        Chairman Talent. Of course, Dr. Whinston, you are on a
    college campus, which makes you a special target probably.
        Mr. Whinston. I would think just the opposite. I mean, we
    have, many people would say, nothing of any particular value.
    And yet these people, in fact sometimes they break in and just
    say, look, we have broken in and this time we are not going to
    destroy your stuff but we just want to let you know that with
    all your sophisticated protection it is not doing you much
    good.
        Chairman Talent. I mean that there are a lot of students
    around who probably are brilliant.
        Mr. Whinston. But students can go anywhere on the Internet,
    and they could be students from India or Pakistan or China who
    just feel like roving the network and finding holes.
        Also software companies announce. We had a case where the--
    --
        Chairman Talent. The subject of the Chinese is probably one
    you should not have introduced.
        Mr. Whinston. Okay. I will withdraw the Chinese mention.
        Chairman Talent. This hearing is not getting into that, I
    will tell you that.
        Mr. Whinston. We saw a posting by Hewlett-Packard that they
    discovered a hole in their operating system, and they announced
    it at say, 10:00 at night. Maybe one of our people saw it at
    6:00 in the morning, but the hackers had seen it probably at
    10:01 and they were roving the world, finding Hewlett-Packard
    sites and breaking in and doing destruction.
        So by the time we tried to use the patch that Hewlett-
    Packard suggested it was too late. We already were wiped out.
        So I think the security issue and the whole issue of
    cryptography is a serious challenge that companies,
    organizations like the AICPA, will deal with, but we should not
    let people think that there is anything absolute in that realm
    that we can rely upon.
        Mrs. Kelly. Thank you very much.
        That kind of segues into the question I was going to ask
    Mr. Hanson, which was whether or not he feels his site is
    secure from hackers. How comfortable are you?
        I can't even see you but I know you are there, Mr. Hanson;
    if you would be willing to respond.
        Mr. Hanson. Well, we use VeriSign and, again, I don't--I
    feel very confident in that. I suspect that anybody that had an
    inclination to break into my seafood site could probably do so.
    I don't know of what benefit it would be; maybe to gain access
    to credit cards. But I haven't----
        Mrs. Kelly. That is exactly what I am driving at, that they
    could pick up the credit cards.
        Mr. Hanson. Well, I would like to flip this around, if I
    could have the indulgence of the Committee for a second because
    we have talked a lot about protecting consumers and in a lot of
    macro sense protecting the country from the Internet. But one
    of the concerns that I have as a small business owner, and
    maybe it can be addressed by other people here, is that people
    that use credit cards to order a product from me are not really
    liable to pay for it because there is no physical signature,
    and about 10 percent of my orders are disputed by customers who
    feel they just don't want to pay.
        When they dispute it to their credit card company, the
    credit card company just wipes it off and takes the money back
    from me. Unless I have a signature from them, from a shipping
    company, from exactly the person that ordered it, not their
    wife, not their son, not their friend, then there is nothing I
    can do, except take them to civil court, which I don't have the
    resources to do every time; especially track people and drag
    them into my State or drag them into my country.
        This is not a problem that I just have. This is a problem
    that everybody has, and that is why the professor here has
    raised a real issue about sovereign Internet cash, which we
    have been talked to about from a number of different companies
    that are exploring that, with some out of the country on-line
    banks.
        It is a concern of ours, and I don't know what is being
    done to address that.
        Chairman Talent. In your case it is not like you can resell
    your merchandise.
        Mr. Hanson. Well, it is gone. They will eat it and then
    they will just call the company and say I never received it.
    That is tough.
        Mrs. Kelly. Thank you very much. There is one other
    question I would like to kind of throw out to the whole panel
    but specifically to Mr. Miller, Mr. Whinston and Mr. Anderson,
    I want to know what you think, just speaking for yourselves,
    what you would think of a Federal law that would require
    parental interaction on the Internet with regard to the
    purchase of products?
        Mr. Whinston. Well, I could take a shot at it. I think
    there is a problem of jurisdiction. The Internet is a worldwide
    business, and we could pass laws in the U.S. that would, say,
    deal with on-line gambling or pornography.
        Mrs. Kelly. I am sorry. I narrowed that, Professor, to the
    purchase of products.
        Mr. Whinston. Okay. So what you mean by product is a
    physical product that is delivered by Federal Express?
        Mrs. Kelly. I mean putting some kind of parental
    interaction required by Federal law for a child to order, for
    instance, as Mr. Brady was saying, drugs, pornography, even
    lobsters, on the Internet.
        If a 7-year-old child--I have a 5-year-old granddaughter
    who is pretty sophisticated. She can do things on the Internet.
    What if my 5-year-old granddaughter picked up my credit card
    and ordered lobsters from Mr. Hanson? That is exactly Mr.
    Brady's point.
        Perhaps there is a need here for some kind of legal
    structure for purchases, and that is what I am asking a
    question about.
        Mr. Whinston. I would agree in principle. Again, there is
    this jurisdiction issue, which is an unfortunate problem, that
    companies, as soon as they see some regulation that they don't
    find attractive, they move out of the jurisdiction.
        So a company could be selling drugs, and I think this was
    the--well, not the Florida case, but the drug company could
    move to some place that doesn't have a strong jurisdictional
    concern and operate from there.
        Mrs. Kelly. But, Professor, if it required a parental
    interaction, in other words, a code number for the parent, some
    way of limiting the child's ability, that would translate
    around the globe. That is not something that--I mean that is
    just simply so that we could control it here, as I see it.
        Mr. Whinston. Well, I would agree that we ought to consider
    such laws, and I think that the question I am trying to look at
    is how do we enforce it.
        So let's suppose we have a company that was opening in
    Florida; there is a law and they decide to move to Cuba. The
    person making the order has no idea where or generally doesn't
    know where the site is located, and they put in an order. If
    the ISP, the local connector, such as an AOL or PSI or MCI or
    AT&T is not able itself to manage that control process, which
    is a lot of them are not interested in or not anxious to do
    because it leaves them open for liability issues, it becomes
    hard to practically enforce the law.
        So I am in favor of the things that you are trying to
    achieve. And certainly myself as a parent or a grandparent
    would be very concerned, but I am trying to look at the
    practical aspect of how we enforce laws which because of the
    Internet's ability to move these servers anywhere they feel
    like and still do business is a practical enforcement problem.
        Chairman Talent. Is the gentlelady finished?
        Mrs. Kelly. Yes, Mr. Chairman.
        Chairman Talent. Okay.
        Mrs. Kelly. Thank you.
        Chairman Talent. Next I will recognize a new member of the
    Committee and welcome him to the Committee as well, Mr. Udall.
        Mr. Mark Udall. Thank you, Mr. Chairman. I appreciate the
    opportunity to serve on theCommittee with you and all my
    colleagues.
        In my district in Colorado, the Second District, which is
    the northern Denver suburbs and the County of Boulder and the
    City of Boulder, there are a lot of small businesses and there
    are a lot of small businesses involved in electronic commerce
    and high tech pursuit. So this is a great opportunity for me.
    So I appreciate the welcome.
        I had a couple of questions, and I apologize I was late
    from another Committee, but I hear a lot right now in my
    district about tax issues, and the moratorium. I imagine some
    of you have been asked the question already, but I would be
    very interested in the opinion of a couple of you as to what we
    eventually do with these tax issues.
        There are a lot of small businesspeople who say to me, we
    are going to penalize Main Street in the long run. The
    businesses who have a physical location on Main Street provide
    more than just economic activity. They provide some of the
    strength of the community.
        Mr. Hill, Mr. Miller, Mr. Whinston, I would be curious,
    without nailing you down, what you think some of the long range
    proposals on the table are for dealing with these tax issues,
    particularly as regards local and regional needs for
    infrastructure and schools and so on.
        Mr. Hill. Well, as you know, the Internet Commission is
    looking at this issue and the administration members are
    Treasury, Commerce, and the U.S. Trade Representative's Office.
    From an SBA or a small business point of view, our concern will
    be to follow their debate and to ensure that as they continue
    down that road that whatever they enact is fair to all small
    businesses.
        At this point I don't have an administration position on
    that. They are still studying it. I don't believe the
    commission has met yet. I am not confident of that. Someone
    just handed me a note. So I think we need to wait and see, but
    clearly it is going to have a major impact on small businesses,
    and we will follow that debate very closely.
        Mr. Miller. Mr. Udall, the information technology
    industry's position is that for the Internet itself, it doesn't
    want double taxation, and that is really what the Internet Tax
    Freedom Act says. The more fundamental question you are raising
    about companies in a local area selling only to local people
    versus companies selling out of State or out of the region
    really goes back to the Quill decision the Supreme Court
    reached several years ago about location and taxation.
        That issue is not addressed in the Internet Tax Freedom Act
    one way or another, but it may be an issue that emerges in a
    discussion of the Internet Commission, which will start meeting
    next month under Governor Gilmore's leadership.
        We as an industry don't have a particular position on that
    one way or the other. All we are saying is it should be a level
    playing field. What you can do in ordering on-line should be no
    different than what you can do ordering through the mails or
    ordering telephonically.
        The challenge, however, I was trying to suggest in response
    to an earlier question from Mrs. Napolitano, is that it is
    possible, and this may even go beyond the scope of this
    commission, that as we enter the 21st century and as we get to
    be a more global and mobile economy, that those economic
    taxation models built on a local sales tax model are going to
    have to be rethought fundamentally.
        The Quill decision aside, the Internet aside, the whole
    idea that the average financial transaction involves me getting
    out of my house, walking down the street, buying something from
    a merchant and coming back, is becoming so outmoded, which was
    really developed basically in the 19th century, or if you want
    to go back actually hundreds of years into the earliest days,
    it just has to be rethought in the 21st century. But I think
    that is beyond this hearing, as Chairman Talent was suggesting
    earlier.
        Mr. Mark Udall. I think, was it Gertrude Stein who said,
    there is no there there, and I think that is the dynamic that
    is at play here.
        Where are you when you purchase something on the Internet?
    You could say that about Washington, too, I think.
        Chairman Talent. Thank you.
        Mr. Whinston. I would agree with Mr. Miller, and I would
    also follow up on your point that it is not even clear where
    the transaction, which I think is your point, where the
    transaction is taking place. Is it at the site, the server, so-
    called, or is it on your client, that is, your machine, where
    the copy is made of the information and then you are entering
    it and finally saying I commit to the transaction?
        We are not even clear legally where the transaction takes
    place. So I would agree with Mr. Miller that we have to rethink
    the tax system as we move towards electronic commerce. Of
    course, we could say let's just get rid of the catalog
    exemption and everybody should pay taxes wherever they buy, and
    that, of course, could take place but then I earlier raised the
    point that for a small company, the administrative costs, if
    they start dealing on the Internet with places in different
    parts of the U.S. and even overseas, keeping track of all the
    tax regime, the changes in the taxes and being able to properly
    collect it, will become a very big cost.
        So to me, the directions you go in, still raises a lot of
    significant problems. I think we all go back to the point that
    maybe we have to rethink as we move towards the millennium; and
    with the continued growth of electronic commerce the way we
    look at taxes will have to be rethought.
        Mr. Mark Udall. Mr. Chairman, I know my time is up but if I
    could make one quick comment. I don't know how it is in other
    States but in Colorado our tax collection and tax allocation
    system is very Balkanized. There may be a silver lining in this
    that it provides us with an opportunity to streamline how we do
    that.
        I hear from a lot of small businesspeople that I am very
    willing to make my contribution to the community but, boy, I go
    to Denver and it is 7.5 percent, I am in Louisville, it is 7.2,
    I am in Boulder, it is 6.8, this is local sales tax, for
    example, and it is a headache. The paperwork is an enormous
    burden for them, so maybe there is some silver lining in this.
    I thank you.
        Chairman Talent. I thank the gentleman.
        Mr. Sweeney.
        Mr. Sweeney. Thank you, Mr. Chairman. Like my good friend
    Mr. Udall, I was at another Committee markup. I do apologize
    for coming late and I would ask that I may submit a statement
    to the record as well.
        Chairman Talent. Without objection.
        [Mr. Sweeney's statement may be found in the appendix.]
        Mr. Sweeney. To the panelists, and more particularly to Mr.
    Hill, Mr. Miller has spoken at length about the great
    opportunities that e-commerce is going to present for the
    future, and Professor Whinston just spoke of the great
    challenges as well that are going to face us.
        I know the Department of Commerce has estimated that more
    than $70 billion in sales will be generated by 2000, and by
    2002 it is around $327 billion.
        I would like to try to get a handle on our capacity for the
    present. How we are able to determine where we are at this
    point and how do we plan for the future? So I would like to ask
    Mr. Hill if the SBA has developed or do you have relevant data
    from this year to last or this year to some other marked period
    of time of how many new business opportunities have been
    created,how many more tax dollars have been generated, how many
    more people are paying taxes because it is directly tied to e-commerce?
        Do we have any sense of the growth today?
        Mr. Hill. In my testimony, I talk about a few statistics
    that we have pulled together. The number of small businesses
    using the Internet has doubled in the past 2 years, from 22
    percent in 1996 to 41 percent in 1998. We estimate that
    electronic commerce is going to grow to more than $300 billion
    annually in just a few years.
        I don't have a table of statistics with me but I would be
    happy to provide that for you for the record, either from our
    Office of Advocacy or from other government sites that we have
    access to.
        Mr. Sweeney. In your testimony, you spoke of the SBA
    efforts thus far, developing a framework for understanding the
    ways e-commerce work, educating certain demographic groups,
    including small businesses. In my district, small business is a
    predominant employer and the predominant means of commerce and
    e-commerce will offer great opportunities and increasing
    certifications.
        I have a concern about identifying what that market is and
    how we can more positively proactively, as a government entity,
    encourage that growth. Could you talk to me a little bit about
    how the SBA, through the Office of Advocacy, is working to pull
    together that kind of information; what new jobs are being
    created and taxes, and how prepared are you, what do you need?
        Mr. Hill. Thank you for the opportunity. We are at the
    beginning of this process, as many people are. The presidential
    directive was issued last fall and we are working very closely
    with the Department of Commerce.
        We intend to launch a campaign very similar to the one that
    we did on the Y2K outreach. We think it is really critical, and
    we have heard today over and over again that we begin that by
    conducting focus groups and doing research to try to clearly
    identify what are the issues and what are the impacts. Again,
    electronic commerce is more than just the buying and selling.
    It is really the transformation of a small business.
        We think from there we need to move into the next phase,
    which would be an awareness phase, where we need to mount a
    national campaign and leverage our existing resource partners,
    as well as our friends in the industry.
        We have been in consultation continually with ITAA and
    other groups that have pledged their support to us, to help get
    the word out about the opportunities. We have heard a lot about
    the external issues facing small businesses as they move into
    e-commerce.
        There are a lot of internal issues, in our view, at the
    SBA, that also need to be thought through and explained.
        Mr. Sweeney. On that note, I know that in the past the
    complaint has been, from both he SBA and the small business
    community, that the playing field hasn't been level in terms of
    accessing information on government business and contracts.
        Mr. Hill. Right.
        Mr. Sweeney. What have you done in that respect and how are
    we using technology to get small businesses out? Do we have
    something going now? Is there something planned?
        Mr. Hill. Yes, sir, we do. At the SBA, we have enacted a
    system called PRO-NET, an Internet-based system that allows
    small businesses to go on and hotlink to the websites of
    government procurement offices as well as identify what goods
    and services they can sell.
        The beauty of the system is that it was intended to be a
    tool for government contract officers to locate small
    businesses who could meet their specific mission needs, but it
    is wide open on the Internet. Small businesses can use it to
    find other small businesses to support them.
        Large businesses can use it as well. We can look at it, and
    if we find that a certain agency may be lacking in their goals
    for small business procurement, we will go to the agency and
    say, have you used PRO-NET? The age-old, tired excuse that we
    hear over and over again, we just can't find those small
    businesses. Well, this is an Internet-based system. I will give
    you the absolute number but I believe it is over 180,000 small
    firms on the PRO-NET site today.
        Mr. Sweeney. That is the kind of hits you had. That is
    great. If you could provide that information.
        Mr. Hill. I would be happy to.
        [The information may be found in the appendix.]
        Mr. Sweeney. I would appreciate that. And either Mr.
    Anderson or Professor Whinston, we have talked about--it is
    ironic. My colleague, Mrs. Kelly, spoke of the potential
    problem with the use of children using credit cards to purchase
    goods through the Internet.
        I had that experience about 5 weeks ago with my 8-year-old
    daughter, who purchased a very nice $125 porcelain Princess Di
    statue. It looks very good in her room.
        Chairman Talent. The gentleman may have actually gotten off
    easily. Is that all she bought?
        Mr. Sweeney. At this point.
        Chairman Talent. It may be all she ever buys for the rest
    of her life.
        Mr. Sweeney. It may be.
        I am interested in how we look at the issue of developing a
    sovereign Internet cash system and what the possible
    jurisdictional authorities are, and what they may be. How much
    work has been done and what would your recommendations be for
    us in the House to begin to look at that issue? Either for Mr.
    Anderson or Professor Whinston.
        Mr. Whinston. So what you are saying is that we, besides
    the development of this sort of private industry money or
    private money, the government should look at developing an
    electronic surrogate for the U.S. dollar, $10 and so forth?
        Mr. Sweeney. Not necessarily. But I am asking what are the
    options and what are the----
        Mr. Whinston. Well, that would be an option, to have
    surrogate money that the banks would make available that would
    circulate electronically. I know the Federal Reserve has a
    study group, the Federal Reserve and some of the reserve banks
    together are studying this whole area of electronic money,
    whether it is private or sovereign; what are the legal issues
    of having private money.
        Because again, Microsoft and some other well-known company,
    IBM, could start letting its liability circulate and not just
    call it money. So you could say the only legal tender in the
    U.S. is U.S. money, whether it is in the traditional form or
    the electronic surrogate, but there could be other forms which
    play that role.
        Some people argue that frequent flier miles, which is
    moving more towards electronic form, is really a type of money
    that the airlines issue.
        The concern about private money, and I just mentioned that,
    is that it may be over issued; that is, many people argue that
    frequent flier miles are over issued. It is hard to use it and
    so there is an incentive to--you have a good thing going. Why
    not just expand it?
        So there are concerns about the development of private
    money. There is an historic precedent;150 years ago we had
    private money in the U.S., and there were some failures of various
    types. So I think it is an area that has to be studied, but there is, I
    think, clearly an interest in creating--going beyond credit cards,
    creating money that people can use electronically; or the efficiency,
    the ability to buy things at very small prices, to buy ball scores,
    stock market quotes, and the desire of the public to have privacy.
        Mr. Sweeney. Will part of the solution exist in how we
    develop a tax structure and how we begin to look at the tax
    issues?
        Mr. Whinston. Well, it relates to the tax issue, because to
    the extent that you have a cash-oriented economy, as it is
    recognized, it makes tax collection more challenging. So as we
    move towards electronic money, which is then encrypted and
    moves around the network, moves globally around the network, it
    presents a challenge for tax collection and also, of course,
    opens up opportunities for criminal elements to move huge sums
    of money around without any hope of detection.
        Mr. Sweeney. Mr. Chairman, one last question, and I am
    going to go back to Mr. Hill on the PRO-NET issue, I am
    wondering--you mentioned that you have 800,000 hits and that it
    is a new process that is available to both large and small
    businesses.
        Have we asked or required that all government agencies
    participate in the posting of those notices?
        Mr. Hill. What is posted on PRO-NET is information on
    individual small businesses. It is very similar to a small
    business registry.
        We have strongly urged and suggested that the procurement
    officers in the Federal agencies use PRO-NET to help them
    attain the quality contractors and service providers they need
    to accomplish their mission needs. So it is not a matter of the
    government logging solicitations on PRO-NET. It is a registry
    of small businesses that are available to do work.
        As a report card, we are paying attention to which agencies
    are using it and which are not using it.
        Mr. Sweeney. How many are and how many aren't?
        Mr. Hill. I will get you the actual accurate number. I
    believe there are quite a few that are using it, but I will
    provide that information for the record.
        Mr. Sweeney. Thank you.
        Ms. Napolitano. I would like to have a copy of that.
        Mr. Hill. Yes. We will provide it to the whole Committee.
        [The information may be found in the appendix.]
        Mr. Sweeney. Thank you, Mr. Chairman.
        Chairman Talent. I thank the gentleman.
        I have some questions. This has been very educational for
    me. Let me go on to this question of private money, because I
    just asked the staff, well, suppose Mr. Hanson wanted to set up
    his own private money, how would he do this? The answer that
    came back was that at least as far as we anticipate this now,
    he couldn't because he is not big enough.
        Do you want to comment on that, Mr. Hanson?
        Mr. Hanson. Yes, because I have actually talked to people
    about this.
        Chairman Talent. Yes, go ahead.
        Mr. Hanson. We have a local bank that is moving on-line,
    Pepperall Trust Company. What they have suggested to us is
    connect their site to ours; allow people to make deposits
    through wire transfer from their own bank accounts and then
    they would settle out accounts through purchases at our site.
        So, in effect, it is virtual cash or the first step towards
    it.
        Chairman Talent. Let me take this step-by-step because I do
    not get this stuff real fast so I have to take it slowly.
        Mr. Miller, did you have a comment?
        Mr. Miller. That doesn't strike me as private money. That
    is still dealing with a federally licensed and regulated
    institution.
        With all due respect to Professor Whinston, I think this is
    Esperanto.
        Chairman Talent. Esperanto, is that a kind of coffee?
        Mr. Miller. That is that language that everyone thinks is
    going to be the universal language that everybody is going to
    go to, that they have been talking about for 50 years. No one
    in the world speaks Esperanto, except the three people in the
    Esperanto Society. I mean, I think----
        Chairman Talent. Professor Whinston, Mr. Miller has been
    provocative with regard to several of your positions, and you
    are a professor and so, please--tell us why this is not
    Esperanto or why if it is Esperanto it is still okay.
        Mr. Whinston. Well, I think Mr. Miller has a good point.
    Today we don't see electronic money. I am trying to look a bit
    into the future and ask the question, from a private sector
    point of view, is there money to be made; is there a demand for
    electronic money versus a credit card?
        I think there is a demand. From the point of view of
    privacy, that is people are not that happy to use a credit card
    if they want to have privacy. The credit card provides others
    information. The credit card number provides an identity to
    where the transaction is going on. People like to not let
    everybody potentially know what they are doing. So there is a
    privacy issue, and then there will be an issue of selling
    things that are in small--the small priced items, ball scores,
    stock market quotes.
        So I see where companies, as we move towards electronic
    commerce as a more pervasive form of business, will look
    towards trying to make money by creating electronic money. I
    mean, it is analogous to the Traveler's Checks that companies
    have found very profitable over the years.
        So it will happen, and we shouldn't wait until it is
    suddenly there and then try to scramble to figure out what we
    are going to do, but to anticipate that that will happen.
        The Federal Reserve, as I indicated, does have a study
    committee and Chairman Greenspan has made public statements
    about his view, or the Federal Reserve's view, on the
    development of private money and has indicated that as a free
    market advocate he sees that as a possible development to take
    place.
        The seigniorage which the Treasury earns by being in the
    money business may be something that will be whittled down over
    the years. So I think it is something that we have to
    anticipate.
        Chairman Talent. Well, let me do what lawyers call a little
    laying of foundation here so I understand what it is we are
    talking about. We are not talking about a line of credit. That
    is a familiar concept. If I was a regular customer with you,
    Mr. Hanson, I might decide I am going to send you a certain
    amount of money to put in an account and I will draw on that
    when I purchase from you. This is beneficial to you because you
    would have a secured form of payment. That is something that we
    can all grasp.
        That is not what we are talking about, right; just a line
    of credit?
        Mr. Whinston. No.
        Chairman Talent. We are talking about a situation, if I
    understand it right, where a big company like Microsoft would
    say to you, that there must be a point at which you use the
    publicmoney to buy the private money.
        Mr. Whinston. That is correct.
        Chairman Talent. And probably they would require you to buy
    large amounts, although maybe it would get sophisticated so it
    wouldn't.
        Mr. Whinston. Well, no.
        Chairman Talent. You would buy half million dollars maybe
    of Microsoft dollars, except that they would give you more in
    Microsoft dollars than the public dollars that you are
    offering. So for $500,000 in United States dollars, you would
    get $600,000 in Microsoft dollars; is there some premium that
    is necessarily involved in this?
        Mr. Whinston. I wouldn't think so, especially when you
    refer to Microsoft. I think it could be on par; maybe a little
    better. Again, we are thinking of international money and if
    you recognize that many sovereign currencies outside the U.S.
    are not all that stable, you would find an instant demand. For
    example, in Russia, people would probably prefer to buy what
    you could call ``Bills'' or ``Gates'' or whatever you want to
    call it, rather than dealing with the ruble, and that would be
    an accepted----
        Chairman Talent. But why would an American consumer who is
    just getting an even exchange ever do that, as opposed to just
    establishing a line of credit of some kind through a bank or
    something with Microsoft? What would be the advantage to you as
    an American of trying to trade in Microsoft currency, unless
    you are getting some premium in it?
        Mr. Whinston. Well, again, I think the currency can be
    configured. For example, Microsoft may sell you currency and
    they could sell you $10 worth and you could use it to buy
    products that Microsoft had arranged to give you at a discount.
    They could work all sorts of clever----
        Chairman Talent. Premium I can understand, and then if they
    gave you some premium is the concern that they might oversell
    it so that if a whole bunch of people decided to spend a whole
    lot of the Microsoft dollars all at once there might not be
    enough Microsoft inventory?
        That would be a nice problem for Microsoft, wouldn't it?
        Mr. Whinston. Right. Well, Microsoft would be a hard
    example to look at because they are such a well-financed
    company. It is hard to conceive of them running into problems.
        But various businesses, banks could start selling and there
    is then a question which the Federal Reserve is looking at,
    should there be reserve requirements for selling electronic
    money?
        Should you somehow have backing in let's say, for every $5
    of electronic money you have out there, you have some Treasury
    bills for a dollar sitting in the bank to understand when is
    the money going to be redeemed?
        In some cases, people may be using it for years; it is just
    circulating in the system.
        Chairman Talent. See, what I don't understand insofar as
    this relates to e-commerce, and I know Mr. Forbes wants to ask
    a question, and I am going to yield to him so he can do it, is
    the only reason you do this in e-commerce that you all have
    identified is security concerns. One way to avoid a security
    concern is just set up some kind of an account, a wire account
    of some kind, so that you don't have to put some generalized
    credit card in; you just draw against the account. I have not
    understood from what anybody has said here today what the
    advantage is of doing that in a private monetary system as
    opposed to a public system.
        You can always just set up a line of credit, if that is
    what you want. Why do you have to buy Microsoft or IBM dollars
    or Anheuser-Bush dollars to get a credit? They are
    headquartered in St. Louis, Missouri, by the way. So you are a
    regular purchaser of Bud Light and you decide to do that over
    the Internet, so why would you want AB dollars as opposed to
    American dollars from a security standpoint?
        Mr. Miller. What you are talking about, Mr. Chairman,
    already does exist. There are companies such as Cybercash where
    you give them a certain amount of good old greenback dollars or
    you use a credit card or write them a check, but anyhow plain
    old U.S. Treasury-backed dollars, and then you have electronic
    money, which to deal with the issue that Professor Whinston was
    talking about, where I want to buy something that only costs a
    dollar or something only costs a quarter over the Intenet and
    the credit card charge makes it feasible for me and the credit
    card company and the merchant to allow me to pay a dollar for
    something using my credit card. Just as when you go into a
    normal retail establishment, they are not going to take a
    credit card in most cases for $10. So the whole idea behind
    Cybercash, which by the way has not taken off. It is a local
    company based here in Reston; you can go visit with them, if
    you want, to see more about their product. But the idea was
    that when you wanted to do real small transactions and they
    wouldn't accept a credit card, or for the reason Professor
    Whinston was suggesting because the credit card, there is an
    easy trail with the credit card, whereas theoretically with the
    cash, cybercash is----
        Chairman Talent. Although a hacker could crack into your
    cybercash account, too, and deplete it.
        Mr. Miller. It is not only the hacker. It is a privacy
    issue, that some people say I want to buy Mr. Hanson's lobster
    but I don't want to use my Visa card because I am a real
    private person and I want them to be able to trace that back to
    me through the Visa card or the MasterCard or the American
    Express card, but if I use this cypercash that I have bought
    through the Cybercash Company with money, that it is harder to
    trace. It is very easy to trace something through Visa or
    MasterCard because the law enforcement officials or the privacy
    people who are trying to intrude into my privacy, they just go
    to MasterCard or Visa and get that; whereas, if they go to
    Cybercash they can find out I got $300 worth of cybercash.
        Chairman Talent. A money order, in other words?
        Mr. Miller. Right, exactly. But they can't show that I
    spent it at Mr. Hanson's location as opposed to Amazon.com as
    opposed to some other website. So I think that is the privacy
    issue, it I understand correctly, that Professor Whinston is
    talking about.
        Chairman Talent. Okay.
        Mr. Forbes, did you have something you wanted to ask?
        Mr. Forbes. Thank you, Mr. Chairman. On this whole issue,
    and I certainly can see in small denominations why there may be
    a need for something like Cybercash but I would suggest that
    you know, international commerce and the frequency of
    international commerce in today's world, even absent e-
    commerce, you know, we are exchanging currencies all the time
    and I am a little bit concerned that it might be distracting
    ourselves from the real issue, which is providing for the
    privacy and the security of using credit cards.
        I know that I was reminded that the Banking Committee
    certainly has had extensive hearings on this issue, and the
    Treasury Department particularly has expressed a concern for
    its ability to track fraud and abuse, particularly if we are
    going to create a whole another, if you will, unregulated,
    outside the Federal money supply, source of funds.
        So I hear where you are coming from, Professor, but I guess
    I do have some trepidation.
        Mr. Miller, if you wouldn't mind, I hear you on Cybercash,
    which I think from a functional point of view low denominations
    might be valuable, but I was sensing, and correct me if I
    amwrong, that you had some concerns about this sovereign money issue as
    well.
        Mr. Miller. I just don't think it is an issue, with all due
    respect to Professor Whinston. I understand the Federal reserve
    is studying it. They need to study something to keep them busy
    over there, with the economy going so well.
        We have something called international money. It is called
    a credit card. Yes, there is going to be competition with the
    credit card companies because people are going to try to get
    their fees down and as Professor Whinston said correctly, there
    is money to be made from being part of this transaction
    process, but at the end of the day we have come up with this
    transaction system. It is called a credit card.
        When I go to France physically, or order something from
    France over the Internet, I don't have to worry about
    transacting that--or doing the transaction. I don't have to
    worry about converting it from francs to dollars. The credit
    card company does all that. They charge a fee. They charge a
    fee to me. They charge a fee to the merchant who sold it to me.
    That is how the process is working.
        Maybe Professor Whinston is right, that there is going to
    be this sudden growth to this, or long-term growth to this, but
    I would be willing to bet one of Mr. Hanson's very nice lobster
    dinners with Professor Whinston that it is not going to be any
    time in our lifetimes.
        Mr. Forbes. Thank you very much.
        Chairman Talent. I understand you have some more, and we
    will go back there in a minute.
        Let me finish, if I can. Mr. Hanson, what you are saying
    your local bank is going to be willing to do is basically act
    as an intermediary and for some kind of premium guarantee the
    payments to you, is that it?
        Mr. Hanson. That is right, but they are also looking at
    creating this relationship with hundreds of other websites,
    too. They are looking to acquire deposits at their bank.
        Chairman Talent. Yes. I can understand why it would be a
    useful service for small merchants.
        Let me address the relative advantages or disadvantages to
    small merchants. I don't know that I have really heard anything
    that wouldn't be equally applicable to business life outside of
    e-commerce. Yes, it is harder for a small merchant to break
    this way into the consciousness of the consumer because he
    doesn't have the advertising dollars. Well, that exists outside
    of e-commerce. Although there may be different ways--for
    example, those services that will aggregate and direct
    customers to small businesses, that is kind of similar in the
    e-commerce or the digital world, isn't it, to the mall?
        In other words, you have an anchor store at a mall and then
    that allows people like smaller businesses to get traffic that
    way? Is that channeling thing similar in the digital world to a
    small kind of concept?
        Mr. Miller. It is, and it isn't. One difference in the
    digital world, Mr. Chairman, from the real world is one of the
    reasons that malls have beaten up Main Street. When you talk
    about another challenge to small businesses on Main Street it
    is the mall, is because of the physical factor. You go in your
    car, you go to one location, and there are no costs to you
    because once you have driven there you don't have to get in
    your car and drive to another place to find the supporting
    goods store or drive to another place get to the candy store,
    et cetera. The cyber world is frictionless. I mean, you can go
    anywhere. One of the reasons the cybermalls, per se, have
    failed, and MCI and other companies tried to set up cybermalls,
    is because the anchor itself didn't work.
        So instead, what is happening, as Professor Whinston
    suggested, is these portals are all trying to figure out what
    the secret is. AOL, in that context, is a portal. Any ISP can
    be a portal. They are all trying to figure out partnerships,
    and it is mutually beneficial because what draws you to Excite
    or Yahoo or AOL or Microsoft network, whatever those first ones
    are, is not just the content they have got on their own page
    but it is their ability to, in turn, reference you to, if you
    are looking for a lobster dinner to Mr. Hanson or from one of
    his competitors, or if you are looking for a new car, a good
    car site.
        So I guess I share Mr. Hanson's concern that those who
    arrive late may be potentially at a disadvantage, but I don't
    think the marketplace is so fixed yet, and I don't think it is
    going to be fixed in the next, I would guess 5 years, maybe
    that is too long a time horizon, that it really is that
    exclusionary.
        Let me draw a different analogy, which is the Yellow Pages.
    The Yellow Pages is sort of everybody but it is always just
    located in the geographical area, Washington, D.C., Northern
    Virginia, St. Louis, whatever it may be. The question is, how
    do you differentiate yourself in there? And the Yellow Pages
    has kind of figured it out by title. You are a baker or a
    candle stick maker or you are mother goods, whatever your
    particular store is.
        The way we do that on the net is through the search
    engines. So the trick is to find those--get placed--I think Mr.
    Hanson is exactly right. If you can't get placed in a search
    engine, and again there are dozens of them out there right now,
    you are clearly going to be in trouble.
        On the other hand, if you can get a decent place on a
    search engine and if you create the idea that you can buy fresh
    food, then Mr. Hanson's opportunities, or anybody who gets into
    this market, are much better than they would ever be in a
    normal business environment.
        Chairman Talent. Sure. It works in the other direction,
    too. The same disadvantages you may have as a small business
    outside of e-commerce exist in e-commerce, but the same
    advantages you have as well, flexibility, all the things I
    think that are moving the economy generally in the direction of
    smaller organizations because you are able to meet consumer
    demand more flexibility will exist. Then you are going to have,
    I would think, some advantages in terms of economies of scale
    as well because you can link up so much more easily.
        For example, big businesses have huge distribution chains.
    You don't need that anymore, because you connect up directly.
    At least in some industries I would think that would be the
    case.
        Now, is there a danger of these search engines, the number
    of them being small enough that they wouldn't be competitive
    and they would acquire too much leverage over the small
    businesses so there is one search engine, let's say, you have
    to be in, and they go to Mr. Hanson who doesn't have enough
    leverage because he is not big enough and say, now, you are
    going to have to pay this enormous premium? It seems to me what
    protects small businesses is if there are enough of them out
    there to hold the price down of access. Do you see a possible
    problem in that area?
        Mr. Miller. Clearly there is a potential problem, but let
    me give you a little more data on point. I visited Network
    Solutions on Monday out here in Herndon, which is where all the
    domain names for dot com and dot org and dot net are. You know
    how many new domain names they register each day? This is a new
    website. 30,000 a day; 30,000 a day go into the database.
        I think with that many new Web pages out there, there is
    always going to be a chance for a new search engine or a new
    portal to come along. I mean, that is what is so exciting about
    this industry.
        Let me go back to your distribution point. I met with a
    company three weeks ago. The CEO is 22 years old. This is his
    third company. He is distributing music over the net. He is
    taking on the largest music companies in the world because he
    believes that the new digital generation that Mr. Hill talked
    about doesn't want to be constrained to have to go to the
    record store and buy a physical record.
        There is a big debate. Some people in the recording
    industry are very concerned about that, the same way that the
    video industry was very concerned when VCRs first came on-line.
        Chairman Talent. Yes. We are going to have a hearing, I
    hope, on this subject, Mr. Miller, with personalities that
    should be very attractive for the Committee.
        Mr. Miller. I am sure it will be.
        Chairman Talent. I feel like I am sort of announcing the
    exciting scene from next week's show.
        Mr. Miller. I will look forward to hearing it. But since I
    met with them and they became a member of my association three
    weeks ago, two of the largest music companies in the world
    which had said previously they were not going to sell music
    over the Web because of the concerns about copyright
    violations, et cetera, have turned 180 degrees.
        I am not saying it is inevitable but it sure smells pretty
    close to inevitable. That, number one, I think the small
    companies are going to succeed and, number two, they have
    changed the whole marketplace almost overnight.
        Chairman Talent. With regard to music, Mr. Miller, then the
    question that begins arising and is arising in the minds of a
    number of artists, and we are going to explore this, is why do
    we need the companies?
        Mr. Miller. That is one of their selling points.
        Chairman Talent. And the companies, if we have this
    hearing, will have an opportunity to explain why the artists
    need the companies. But why not just go directly on-line? There
    are a lot of issues there.
        Let's get to the tax issue, which is certainly one that the
    government is going to have to be involved in because it is our
    function to regulate interstate commerce and to resolve these
    kinds of issues.
        Mr. Miller, with the greatest respect to you, and I see the
    point you are making about the overall benefits of this being
    so great as necessarily to outweigh the detriments to local
    governments, but Mrs. Napolitano was right. I was in the state
    legislature. I represent a number of municipalities now. This
    is their tax base that is at issue here. They are the ones
    providing the trash pickup and filling the potholes and doing
    the day-to-day things that are so absolutely vital, and we will
    hear from our constituents if those start going down because we
    are losing money from e-commerce sales.
        So you said something that was interesting to me. You said
    all the e-commerce community wants is equality. You want to be
    treated the way the catalog companies are. In other words, you
    are willing to pay a use tax, for example, on a transaction
    like that. I mean, is that correct? Elaborate on that a little
    bit.
        Mr. Miller. What we mean by that, Mr. Chairman, is let's
    say that there were no Quill decision. Let's assume the Supreme
    Court had ruled differently, which means that if you ordered
    something by mail or telephone from L.L. Bean you had to
    automatically pay the Maine sales tax, or if I live in Virginia
    I automatically had to pay the sales tax.
        Chairman Talent. Did the Quill decision say that States
    can't tax catalog sales?
        Mr. Miller. It basically said, as I understand it, and I am
    not a legal expert but I think I have it fundamentally right,
    if a merchant doesn't have a physical location, does not have a
    site in the State where the customer purchases the product----
        Chairman Talent. In the State?
        Mr. Miller. In the State--that basically the customer has
    to pay on his or her own the sales tax. In other words, what I
    am supposed to be technically, and I guess I shouldn't confess
    this. I may be confessing I am violating some tax law. If I
    order something from L.L. Bean and if L.L. Bean doesn't have a
    physical location in Virginia when I order this product, then I
    don't have to pay the sales tax. I am supposed to turn around
    at the end of the year, when I pay my Virginia State tax, and
    voluntarily say, well, I bought this many products outside the
    state.
        Chairman Talent. Sure. We all know what that means.
        Mr. Miller. Exactly. Which means that it doesn't get paid.
    So that is what the Quill issue said. It is a basic issue of
    what is called nexus.
        Chairman Talent. In fairness, though, Mr. Miller, the Quill
    decision, was it a constitutional decision?
        Mr. Miller. Yes.
        Chairman Talent. Okay.
        So it wasn't based on a silent commerce clause type of
    thing? It is not something we can do anything about?
        Mr. Miller. You are beyond my pay grade in that area. I
    think you need some constitutional scholars to look at that. I
    am sure there is some disagreement.
        Chairman Talent. You serve so well as an expert in so many
    different areas already, Mr. Miller.
        Mr. Miller. Thank you, Mr. Chairman.
        But I think that that kind--so I am saying----
        Chairman Talent. Let's forget about that for just a minute.
        Mr. Miller. So if you said that ordering something on-line
    were the same rules and regulations, that is fine. What we
    objected to is what was happening in many States, Mr. Chairman,
    where some State regulators, and in some cases some State
    legislators were saying that an ISP, an Internet Service
    Provider, whether you are talking about a large one, a portal
    like AOL, or whether you are talking about many of these local
    ones, not only would they have to pay their telecommunications
    taxes that they are normally paying because they are using
    telephone lines, in addition they would have to pay an
    additional telephone tax.
        That is really what this debate was all about. It wasn't
    about whether you pay sales tax. That was already--what we
    would contend is that was already decided, for better or worse
    in terms of the outcome of the local governments, many years
    ago in the Quill decision. I think what happened when the bill
    went through Congress is some of the governors were coming to
    Congress and saying, overturn the Quill decision and then we
    won't object to what--and some of the mayors and other
    localities said, we don't care about this Internet Tax Freedom
    Act.
        All we are saying is that is a different issue. If Congress
    wants to tackle, if they can legally, I am not sure they can,
    the Quill decision, fine, and say that L.L. Bean products
    whether they are sold telephonically, through the mail or on-
    line all require the consumer to pay a local tax, that is fine.
        Chairman Talent. The Quill decision couldn't have been a
    constitutional decision. It is not like a service of process or
    something. It had to deal with a commerce clause issue, because
    if Congress wished to, provided that you are dealing with a
    company that does business in the United States, which the
    professor has mentioned that some of these are international,
    Congress could authorize this.
        Mr. Miller. Let me get back to you on that. I don't want to
    be definitive on that.
        Chairman Talent. I am not an expert on this either.
        Mr. Miller. But that is the defining decision about on-line
    catalog buying, and that is the same issue that applies here on
    the Internet. So again, do we disagree?
        Chairman Talent. Then we have the question of where is it
    sold. You would almost have to do it where the product or
    service is delivered, wouldn't you? Because the server is in
    one place and the business is in another. Mr. Hanson could use
    servers in places other than where he is at. So you would
    almost have to do it in the jurisdiction where it was
    delivered, right?
        Mr. Miller. That is right.
        Chairman Talent. Heck, you could order it on a laptop in an
    airplane. Not even delivery. You probably have to do it where
    the person ordering the service was domiciled, I would imagine.
        Mr. Miller. That is the challenge that they were trying to
    face, because obviously we have been talking mostly about
    sweaters and lobsters.
        Chairman Talent. Right.
        Mr. Miller. But, as you know, a lot of this is going to be
    digital. They are going to download a piece of software which
    is never going to be physically in a physical form, or you may
    be getting some technical advice. Let's say you get some advice
    from your accountant online, and then the accountant bills you
    for that. I mean, all kinds of questions about that. So even
    though it is relatively easy when you are talking about a
    Federal Express truck or a UPS truck dropping something off,
    Mr. Sweeney's doll that his daughter ordered, it gets much more
    complicated when you are talking about servers being in
    different locations, as Professor Whinston said, or services as
    opposed to hard goods.
        Chairman Talent. Professor, I understand that figuring out
    what tax you are to charge is difficult, and that is difficult
    in catalog sales today. But why couldn't we take advantage of
    the Internet to solve this problem? In other words, if Congress
    said to the States and the localities, if you want to charge
    your tax here is this certified kind of program about taxing
    schedules around the country. All right? You better make sure
    that you have entered your tax on this schedule so that when
    the business person has to figure out what they are going to
    pay in tax, they click on and they can do this very easily. If
    you are not on here, they are not liable. What is on there, by
    the way, better reflect what you are really taxing, because
    there will be penalties if you try and kick the tax up by
    saying it was bigger than it was. There are municipalities that
    might do that.
        Couldn't we solve this through some kind of Internet?
        Mr. Whinston. Yes, I think except for this jurisdictional
    issue where somebody just moves the server outside of the U.S.
    and then it is up to the Customs people to deal with it, but I
    agree with you and I think that is actually an interesting
    opportunity for a small business to go in to that whole area of
    saying to lots of companies, I am going to focus on the tax
    issue. So every time you have a customer, when you need to
    compute the tax you jump to my server and I will provide that
    information and sell it to you on a per transaction basis or
    have a fee, a monthly or yearly fee. It would be specialized
    business where somebody would just focus on the whole question
    of taxation and keeping track of when things change and
    updating it and certifying it.
        I think that could work, except of course for any
    jurisdictional problem.
        Chairman Talent. What we might have to do, though, is if
    this is going to be a legal consequence, if the business is
    going to be able to have as an absolute shield against further
    liability, and be able to say, look, we accessed and charged
    what was on this schedule, it probably would have to be some
    kind of standardized program, possibly federally supervised.
    You could outsource the work in doing this, but you would have
    to have some kind of government imprimatur to it to make that
    work. I think we could solve that problem.
        I have just been informed by staff that he is leaving me to
    set up that business, so thank you very much, Professor
    Whinston.
        Mr. Miller. Mr. Chairman, could I suggest one other part of
    that, too?
        Chairman Talent. Sure.
        Mr. Miller. Which is, you could also do something close to
    what the AICPA is doing, again built this into the transaction,
    in terms of the quality of the merchant. I mean, in addition to
    the separate seal process, which the AICPA has set up through
    their CPA trust, you could, for example, have automatically
    built into the transaction a D&B. You know, a lot of times when
    you are doing business with a merchant for the first time, you
    do a Dunn & Bradstreet, or you go to some other independent
    rating organization and you get a rating back to make sure they
    are legitimate and pay their bills on time, et cetera, et
    cetera.
        That can also be done, built into the electronic
    transaction. I know Dunn & Bradstreet is thinking about it, and
    other companies are thinking about it. So a lot of these things
    are very difficult for small businesses if they had to be done
    in a physical world, because they would require a lot of
    additional staff resources, done electronically for a
    relatively minimal fee could be built right into the
    transaction.
        So if a small business person is ordering from a new
    supplier for the first time and says, I am concerned, is this a
    legitimate supplier, I want an independent verification of
    that, that could literally be built into the transaction, where
    the small business person would pay some kind of automatic fee
    when getting that information and it would come flashing up
    red, saying don't order from this merchant; they have got a bad
    credit rating or they got a bad record of delivery.
        So that could even go beyond the general kind of rating
    system that the CPA WebTrust has built up, which I think is
    excellent, to much more specific if the merchants wanted to pay
    for it.
        Mr. Anderson. Mr. Chairman, actually we are working on the
    business-to-business end of that to do that exact piece. CPA
    WebTrust right now is business-to-consumer, but we are well
    aware of the business-to-business piece of the equation to
    legitimatize those types of transactions so you know who you
    are dealing with and that you can be assured that you are
    entering into a secure transaction and that you are going to
    get and get paid for what you are buying.
        Chairman Talent. Focused on residence or domicile, you have
    to figure that out, too, because people, at least outside of
    the movie the Matrix, don't exist in cyberspace. They live some
    place.
        Mr. Forbes. Most of them.
        Chairman Talent. I mean, they occupy space. This is matter
    we are talking about here. So you could tie it into that. It is
    not completely clean. But you know then, if you did that,
    forget about your privacy being protected by having some kind
    of separate money because every transaction that is taxed has
    to go to where you live, with everything else that you could
    accessthrough that.
        I don't want to think out loud when you all have important
    things to do.
        I think I am basically done, but Mr. Forbes has some more
    questions and I would recognize him.
        Mr. Forbes. I will be very quick, Mr. Chairman, because our
    panel has been very patient.
        I do appreciate your presence here today. I have found this
    to be perhaps one of the most productive and informative
    hearings that I have been to in a long time. First of all, let
    me thank the AICPA and the ITAA, both of you, for the
    leadership that your trade associations, frankly, are bringing
    to this question. I mean that sincerely, because I am a great,
    great believer in what is taking place in the world of e-
    commerce.
        I have two quick questions. The first one to Mr. Hill, if
    you would, sir. My sister-in-law owns a novelty business,, a
    very small business in Patchogue, Long Island, and she
    determines that it is to her advantage and the growth of her
    business to get into e-commerce. So she picks up the phone and
    calls the Office of Technology at the Small Business
    Administration and says, how do I do it? What do you folks do
    with that question?
        Mr. Hill. At the SBA, we are developing our campaign now
    but currently what we would say is, as Mr. Hanson has said, we
    would start out by congratulating her. She is seeing the
    future. This is an important thing. We would reaffirm to her
    that this is something that she should be doing.
        I think Mr. Hanson's testimony earlier was right on the
    mark. We had a long discussion about search engines and
    portals, but if you are a small business like your sister-in-
    law, the very first thing you have to do is get your own
    website. It has to be a good one, because you can have 12
    search engines listing your commodities, goods or services, but
    if it is not done with a certain degree of expertise then you
    won't ever show up on a search, no matter how many times people
    look.
        Mr. Forbes. Mr. Hill, does the SBA have the ability right
    now to tell her how to do that? It is a really easy yes or no.
        Mr. Hill. The answer is no, but we are developing it and we
    intend to do that.
        Mr. Forbes. I appreciate that. I have to say, as somebody
    who has great affection for the Small Business Administration,
    I think you folks have missed the boat completely. I don't
    think it took a presidential directive to understand that this
    is the most aggressive, fastest growing area for small
    businesses and the Small Business Administration is really
    absent on this whole question.
        I mean that in the most respect to you, Mr. Hill, but I
    think you need to go back to the agency and you need to sit
    down with those folks and you need to kind of sit down and
    figure out how this agency, which is charged with helping small
    businesses, can do a better job of helping educate and inform
    the small businesses across this country who want to get into
    this business, and I would hope that your involvement in the
    hearing today would suggest to you as well that this is a great
    void at the SBA.
        SBA is doing some great things in cutting edge assistance
    to women-owned businesses and minority-owned businesses but I
    think that we have literally missed the boat on this thing, and
    it is not like we didn't see it coming. So I would just
    encourage you, Mr. Hill, to go back and send a wake-up call. It
    takes more than just a presidential edict to suggest that we
    need to do something in this area, and I thank you for being
    here today.
        My final question, if I might, for either Mr. Miller or
    also Mr. Hanson, one of the areas that is of, I think, great
    confusion to those who are engaging in commerce on the Internet
    is the whole idea of advertising and the preponderance of spam
    and just what that is doing to run interference on qualified
    businesses, wonderful opportunities like Mr. Hanson's, people
    who don't have the opportunity to be on Good Morning, America
    or some national media outlet, how do they get their word out
    in the wake of what I think is one of probably the growing
    problems on how you get legitimate advertising on the Web
    versus, you know, all of this stuff that is being bombarded to
    people when they go on-line and they have got 435 unsolicited
    messages?
        Mr. Miller. Well, I think Chairman Talent hit it on the
    head a few minutes ago. In a sense, the challenge is no
    different in the cyber world in terms of advertising than it is
    in the analogue world, which is how do you differentiate
    yourself from everybody else.
        It goes back to the point that Mr. Hanson made. Number one,
    it is the quality of your website. Number two, it is hooking up
    with the right search engines and making sure you are listed on
    all the right search engines.
        Number three, it is looking for partnership opportunities.
    I can't speak specifically to Mr. Hanson's situation, but I can
    talk about a small golf shop that I know of that teamed up with
    a travel agency that promoted trips, on the theory that if they
    cross marketed across those websites, the travel agency sent a
    lot of people on golf trips and then they put a click on their
    website to this golf shop on the assumption that people would
    perhaps need some golfing equipment.
        In fact, the theory behind some models, like the Pea Pod
    model, although the Pea Pod is primarily just in food, is you
    do exactly that; you would come to the website and there would
    be what is called an intelligent agent, and it would say, Mr.
    Miller, it is nice you signed up to go to Pinehurst. By the
    way, I know a golf shop that is having a special on clubs.
    Wouldn't you like to go there?
        So you click over to that one and then you go to that site
    and they say, well, we know a place that has the newest books
    about golf. Wouldn't you like to do that?
        This isn't all fantasy. This can be done today. The
    industry is trying to figure out exactly how that works
    because, as Mr. Hanson said correctly before, the early metrics
    were how many visitors do you have? But now people are talking
    about things like sticky websites, not just people coming to
    your website but actually staying, and then the ability to
    actually sell out the website and refer.
        I don't have an answer yet, because we are still finding
    our way through it. So there is no simple answer, whether you
    are talking to General Motors or whether you are talking to a
    small business. We are all trying to figure out what it is that
    is going to separate the wheat from the chaff. When we figure
    that out, obviously you are going to have some separation of
    the successful business from the unsuccessful.
        The early theory, Mr. Forbes, was just get out there early,
    just get out there early. But then the question----
        Mr. Forbes. Which worked when there were not so many people
    doing it, right?
        Mr. Miller. Exactly. And Amazon.com, clearly their market
    cap today is a reflection of a belief among a lot of investors
    that that works. But with Barnes & Noble out there, too, and a
    lot of others, how long will that hold? I don't know the
    answer. The answer is the marketplace will determine that, and
    we just don't know yet.
        Mr. Forbes. Thank you.
        Mr. Hanson, could you quickly just comment on the
    difficulties or not, and maybe it is a little tougher for you
    since you have had a little notoriety, about advertising and
    getting the word outabout your seafood business?
        Mr. Hanson. Sure. Well, actually, I mean, I received
    attention from Time Magazine because I came up number one on
    the search engines, which is----
        Mr. Forbes. That helps, too.
        Mr. Hanson. Yes, absolutely. That is not easy to do. We
    have several different types of strategies. One is we link up
    with other websites that there is a synergy between the two.
    Number two, we own eleven different Web addresses so we come up
    under seafood now, but actually also come up under lobster on-
    line. We just basically buy up as many domain names as possible
    because there is a huge secondary market now in domain names,
    and that also allows us to come in and index higher on the
    search engine.
        And then third, that the company that I work with, Global
    Store, has eight people, and I feel bad for them. All they do
    is sit around all day an do what is called ``medicoding'' and
    they go through and they retype in these key search words into
    all of these different indexes. It is very labor intensive.
    Some days we come in in the top 20. The next day I might come
    in all positions, 1 through 10, on a search engine. But it is
    something they have to do every single day. These are people
    that earn $40,000 a year each because they are programmers and
    there are four of them working on it. I couldn't afford to do
    that myself or even hire these people, but Global Store was
    able to do that because they have the resources.
        Mr. Forbes. Thank you very much.
        Thank you, gentlemen, for being here. And thank you, Mr.
    Chairman.
        Mr. Miller. Mr. Chairman, just one more response to Mr.
    Forbes. Every IT company that is in the e-commerce world, which
    is virtually all of them, are doing as much as possible now to
    reach out to small business. To some extent the big business
    world, it is not saturated; they are constantly updating and
    learning new things, but if you look at IBM, Microsoft, Oracle,
    AOL, NetScape, you talk about any of them, in terms of what
    they are doing right now, they are doing everything possible to
    reach out to the small businesses because they see, as Mr. Hill
    pointed out earlier, while it is impressive that 41 percent of
    small businesses now have a website, that is 10 million
    businesses, something like that. If you assume there are 23
    million, that still means there are 12 or 13 million that don't
    have a website.
        So in terms of where you go to try to sell your product and
    service, the opportunities to sell a service to Ford, Ford
    already has websites and Web designers, et cetera. The
    opportunity to sell to the other 20 lobster people in Maine, or
    40 or 50, is really where you are going to want to go.
        Chairman Talent. Mr. Thune wanted to ask a question or two
    or just to make a comment.
        Mr. Thune. Well, Mr. Chairman, I think probably every
    question that could be asked has been asked. I appreciate very
    much, though, your holding this hearing. I think this is an
    incredibly important subject and one with which we are going to
    have to grapple in the days ahead. I appreciate the fact that
    you have allowed our Committee to begin examination of what I
    think is a very important issue.
        Some of you have probably seen, and maybe you made
    reference to it already, last week's Wall Street Journal story
    about stock transactions that are now conducted electronically
    and how we are going to at some point probably end up with a
    24-hour market because there are so many companies out there
    that are making that service available.
        It just points again to the dramatic changes that this is
    making in the way that we do business. I think for my state of
    South Dakota it presents enormous opportunities. We have
    traditionally been isolated by distance, and I think it is just
    incredible, in terms of if we are willing to make the
    investment that is necessary to have everybody wired and ready
    to go.
        So on the other side of it, I think it also presents some
    enormous challenges. The South Dakota Retailer Association was
    in my office yesterday to talk about the question of equity and
    how we figure the tax burden in terms of Maine Street business
    versus Internet and catalog businesses in a lot of the States.
    Our State is a sales tax State, and the competitive
    disadvantage that they are under relative to those that are
    doing business either through catalog sales or the Internet,
    and that has been an issue that has been visited here before,
    and I am sure will be again, but I think this is going to
    amplify in a bigger way this issue and how we address State and
    local government's needs to collect revenue, and address the
    equity argument as well with our retailers on Main Street.
        So it is going to be a big subject, and I think as this
    thing continues to grow and the opportunities are out there, I
    hope that we, in particularly rural America, can take advantage
    of those, but I think at the same time we are going to have to
    figure out how best we accommodate that growth in a way that
    protects and respects the rights of States and local
    governments to collect revenues, as well as respects the rights
    of Main Street businesses.
        So thank you for holding the hearing, and I look forward to
    further discussions on this subject.
        Chairman Talent. I thank the gentleman for his comments and
    I think they are probably as good a summation on the hearing as
    I could make. So I will thank the witnesses for your indulgence
    and adjourn the hearing.
        [Whereupon, at 1:00 p.m., the Committee was adjourned.]

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